Operator:

Thank you for standing by. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Trimble First Quarter 2024 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Rob Painter, President and Chief Executive Officer. Rob, you may begin your conference.

Charles Albert Dillard:

So I guess my first question, I just wanted to dig in more into the financial controls issue. I was hoping if you could give a little bit more detail on just, I guess, like what happened in terms of the IT and the impact on revenue recognition. And then, I guess, to what extent, at least right now, do you think this could potentially impact the income statement? And just like how are you thinking about the timing of resolution?

David Barnes:

Chad, so the process is that our 10-K was filed, as you know, in February and the PCAOB selected EY's audit of Trimble for their review. And as the EY team looked over their work papers on the internal control side of things, they concluded the documentation that they and we had would -- was not sufficient to meet the standards of the audit of internal controls. And Chad, the thing I'd point out is the EY support of our financials is unchanged. This is just about the internal controls. No issues with our numbers have been identified by EY or us. What's happening is, EY is going to go through enhanced audit procedures to confirm the numbers and then we will issue an amended 10-K which will enable us to issue the 10-Q as well. This -- we've looked at -- companies have gone through this and it takes probably more than 1 month, hard to predict the timing. It's inconvenient but we, at this point, have no reason to believe that our numbers will change and we're working cooperatively with EY to get through it.

Robert Painter:

So bookings in the quarter continued to be strong. So put together really a couple of years now of strong progression in the bookings. The bookings -- the ACV bookings were over 20% growth in the quarter. So we like what we're seeing in terms of the progression there. Within that, Trimble Construction One is clearly an offering that we've been talking a lot about over the last, say, 1 year, 1.5 years. The bookings grew faster than that within Trimble Construction One. So Trimble Construction One, we're continuing to increase the level of adoption through that as we've transformed our selling organization and the processes and the systems to go along with that. So I'll give you an example, in North America, I think about 80% of our bookings were Trimble Construction One bookings within the quarter and those grew at a level of almost 2x the bookings level growth on a year-over-year basis. So strong progression, Chad.

Jason Celino:

Maybe double clicking on that a little bit. When you think about the growth that you're seeing in AECO and maybe if you can go a step deeper on TC1? Is there a way to think about it versus net new versus expansion?

Jason Celino:

Yes. I mean it seems like you're executing quite well. I know the demand environment doesn't make it easy. But maybe relative to 90 days ago, maybe can you just give us an update on how some of that end market or macro kind of sentiment is within that segment?

Operator:

Your next question comes from the line of Jonathan Ho with William Blair.

Robert Painter:

Jonathan, it's Rob. Good question. We actually already see that in AECO. And so you can see the growth in the quarter, for example, was the 18% on the ARR as well as 18% revenue. If you look in transportation and logistics, you actually have the same phenomenon -- total revenue up for ARR up [ 4% ]. So it correlates to the amount of recurring, it's in that. The one that will be disconnected and would remain so for, I think, a number of years would be field systems, which is predominantly a hardware business. I think they recurring, as I recall it, in the 20% range on that. So those will remain separated and thus, leave a separation at the total company level.

Robert Painter:

Yes, a good question as well. So another strong quarter of bookings growth. That's 2 quarters in a row of records for the business, a record Q4 and then a record with the Q1 as well. What I would say is, there's a few things to add on to that. So the team began successfully cross-selling Transporeon solutions to existing Trimble Transportation customers here in North America, which exemplifies go-to-market synergies and we think we're just getting started. Conversely, we've been selling some of our maps solutions into the European market. Those bookings growth were both with the shippers and carrier customers.

Operator:

Your next question comes from the line of Jerry Revich with Goldman Sachs.

Phil Sawarynski:

Jerry, it's Phil. And thanks and good question because I know there's a lot of moving parts in our outlook. So, yes, if you think about Q1, as I talked about the term licenses, are largely a Q1 dynamic and that's that $50 million drop from Q1 to Q2. So if you look at the margin basis, I think it's around 400 -- a little bit more than a 400-point drop. So the large part of that, I'll put it into actually 4 buckets, half of that or a little over half of that is because of the dynamic of the term license. If you remember, as the term licenses actually get recognized all upfront. So that's high-margin revenue. And then as you move into Q2, the other 2 pieces are, one, we have our merit raises that take effect in April. And so that's about 100 basis points and then another 100 basis points is some additional OpEx primarily around the AECO business and the sales and marketing and R&D spend that we're -- we've talked about incremental spend there to continue to drive that growth engine. So -- and then the remainder is the term license to bridge that 400 points.

Robert Painter:

Well, so the Transporeon will certainly help them at the company level in terms of bringing up the ARR growth potential. The other side of that is the mobility business. And so the net of that gets to the guide that we put forward, Jerry.

Robert Painter:

At this point, no. No, we're maintaining the outlook on that. It has -- I mean, it would buy us more than above to the mid but we're going to leave that guide where we are right now.

Kristen Owen:

Rob, you called out the Rule of 40 balance for AECO. And I think just in this previous question had about 100 basis points going to reinvestment in that business. Just wondering if you can talk about sort of balancing that lifetime customer value versus your customer acquisition cost, how you think about investment versus growth to build out the opportunity set in that business?

Robert Painter:

Yes, it's a great question. So on a multiyear basis, I would frame this market as the largest available TAM that we have to service. We know the multitrillion dollar size of global construction. We're playing both in vertical construction, horizontal construction. We know it's a market that's large, global, underserved, underpenetrated, has challenges with productivity at the intersection of productivity and sustainability, which our solutions positively affect. We see more and more customers wanting to buy into ecosystems and our right to win, we think begins with the breadth and depth of solutions we have across the continuum of the life cycle. Furthermore, if you subscribe to a notion that the world is becoming more data-centric, more data-driven, then you will like the touch points we have across this industry where we can, we believe, move from optimizing tasks to optimizing systems.

Justin Pellegrino:

This is Justin Pellegrino on for Rob. I just wanted to look at the equipment side and what does a typical downside in the equipment side look like versus where we're at now? Are we most of the way into a normal downturn? Just any color there would be I think helpful.

Operator:

Your next question comes from the line of Rob Mason from Baird.

Robert Painter:

Rob, thanks for the question. You're right about the original thesis of it is, we didn't, let's say, create our model fundamentally around bringing the European applications into North America. We saw that as additive opportunities and we for sure saw that we could do it. We just didn't predicate the deal on that being the fundamental thesis. So yes, hey, good news or that's the, the example, the customer I talked about in the prepared remarks, it's a multi-hundred thousand dollar ARR win that we have. And it actually is using the autonomous quotation product that we talked about earlier as well. So not even, let's say, the -- let's call it, the older or existing application capabilities we had in the business, it's actually a new one and so we find that very interesting to think about.

Robert Mason:

Okay. Just as a follow-up. Again, as we get through this year, I guess we'll get recalibrated to the new -- the go-forward segments and the business without ag. But I was just curious in particular on the hardware and perpetual software gross margin trend. It's trended lower over the last 12 months. But my suspicion, ag had something to do with that. At 44% in the first quarter, how does that look on a go-forward basis without ag as we go through this year?

Operator:

Your next question comes from the line of Josh Tilton with Wolfe Research.

Robert Painter:

Yes.

Phil Sawarynski:

Yes. Josh, it's Phil. So I'll answer -- your second question is the easy one. Yes, you are thinking about it correctly. Our 53rd week encompasses January 1, 2025 and a large portion of our term licenses renew around that date. And so you are correct in thinking that the 53rd week roughly $70 million of the $85 million there are the term licenses that renew. On your first question, yes, the -- there is an element of choice in this within AECO that we've had and we continue -- we'll continue to have that's largely in our structures business. And some of it has to do with the complexity and the horsepower around the offering itself where it's challenging to move that more into the cloud. So you will see that dynamic going forward, at least for the foreseeable future.

Phil Sawarynski:

Correct. It's a limited subset of the total AECO offerings.

Robert Painter:

Josh, it's Rob. I'll take this one. I think it's a really good question. It's not just business as usual. It really does change how we're thinking about the business, how we're running it in some of -- at least the value creation opportunities that this unlocks. This does simplify and focus the company and I think provides a great new baseline for us as we move forward in executing the strategy. If we look at the AECO assets in that segment as an example, this is a business that is now operating at over $1 billion in ARR. It's a scaled ARR software business. This mandate in the business enables the team to take, let's say, the processes and the systems capabilities across a broader swath of the business than what we were doing previously.

Robert Painter:

Yes. No, I like the question. And I used the words in the prepared remarks about a multiyear overnight success. This journey is 1,000 little steps. We launched Connect & Scale of January 2020. I think what we have now creates a new baseline. But let's also look at the facts in -- the fact base, I should say. In 2018, we had $1.1 billion of ARR. We closed Q1 at $2.03 billion of ARR. In 2018, we were 31% recurring revenue as a business, as-adjusted in Q1 were 63% ARR. We had EBITDA of 22.6% in 2018. We closed Q1 at 27.9%. Structurally, our gross margins in 2018 were 58% in Q1, adjusted to 67.5%. Over the last 5 years, we produced 44% operating leverage.

Operator:

Your next question comes from the line of Tami Zakaria with JPMorgan.

Robert Painter:

This is Rob. I'll take that one. So it was a -- it's a multi-hundred thousand dollar ARR, it's over $400,000 ARR in that example that I used, so therefore, the ACV is over the $400,000 -- yes, $400,000 as well. In terms of the go-to-market motion, it's the -- think of it as a named account seller who is responsible for the account in North America, bringing in a sales engineer or sales specialist from Transporeon, who knows the depth of the functionality to be able to, I'd say, be conversant with the customer and the value proposition and how to use it. And that's actually very similar, Tami, to Trimble Construction One when we're selling a breadth of offerings, we'll often have what we -- now we do have named account sellers. And then we can bring in the specialists -- technical specialist to really know the depth of a given solution to make sure that customer can get the most value out of that. Did that answer your question?

Robert Painter:

Okay. So hey, on the -- what's the multiyear targets, we're going to have an Investor Day in December. And Phil mentioned that in his prepared remarks. I think we have been saying second half of the year but we're narrowing that to December. So that's the formal update. I appreciate that in the interim there will be questions of how do we think about that progression of the business and the model. And I think that we can continue to provide color in the next couple of calls. But what we already know is the baseline and I want to highlight that. We know we have a baseline from the quarter on -- or you can actually say, take the year, where we're guiding at the -- for the level of EBITDA for the company between 26.5% and 27.5%. We've talked about the ARR growth. They're guiding 11% to 13% organic.

Operator:

That concludes our question-and-answer session. And with that, that concludes today's conference call. Thank you for your participation and you may now disconnect.

Operator:

Good morning, and welcome to the Trimble Fourth Quarter and Full Year 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Rob Painter, Chief Executive Officer of Trimble, you may begin your conference.

David Barnes:

Thank you, Rob. Slides 6, 7 and 8 cover the financial highlights for the quarter and the year. Organic revenue growth in the fourth quarter was plus 3% and for the year was plus 1%. Excluding the agriculture business, growth was 6% in the fourth quarter and 4% for the year. Standout metrics for 2023 include a 470 basis point improvement in gross margin and $555 million in free cash flow, enabled by profit growth and the success of our efforts to bring inventory levels down. With net debt at $2.8 billion, we remain ahead of the deleverage plan we put in place at the time of the Transporeon acquisition. We have paid down $268 million of the debt incurred to finance the deal. We ended the year with net leverage of 2.8 times, only modestly above our long-range target of 2.5 times. The JV with AGCO is pending regulatory approval, and we continue to expect that the transaction will close in the first half of this year. For modeling purposes, we have assumed that the deal closes early in the second quarter. With debt paydown following the AGCO JV transaction close, our leverage will be below 2 times. Slide 9 covers revenue trends by geography and business model. $1.98 billion of ARR is the standout highlight, up 24% year-on-year and up 13% on an organic basis. Product revenues, which are non-recurring and predominantly our bundled hardware and perpetual software, were down 3% year-on-year. Excluding agriculture, product revenues were down less than 1%, reflecting the stabilization of these businesses now that dealer inventories have come well down from their peak in early 2022. Dealer inventories are now broadly in line with dealers' business outlook, and our sales trends going forward are expected to track underlying demand trends. By geography, growth in North America reflects the relative strength that Rob referenced earlier. APAC revenues were strong, driven by growth in Australia and India. Revenues were down organically in Europe, reflecting challenging macroeconomic conditions across many the end markets we serve there. Slide 10 breaks down performance at the segment level. In Buildings and Infrastructure, the highlight in the quarter was the strong performance of our recurring revenue offerings. Bookings in our AECO software businesses increased over 30% year-on-year, driven in part by the strong cross-sell and TC1 performance, which Rob mentioned earlier. Aided by the bookings performance, segment ARR grew year-on-year by just under 20%, with net retention over 110%, and at the highest levels this business has seen. Segment revenues of non-recurring offerings, principally machine control for civil construction customers, were relatively flat year-on-year, resulting in total segment revenue up organically by 10%. Segment margins were up by 290 basis points year-on-year, driven both by fixed cost leverage and by the mix shift toward higher margin software offerings. In Geospatial, revenues grew organically by 1%. Our && revenue in this segment breaks down across three broad categories

Operator:

[Operator Instructions] Your first question comes from the line of Kristen Owen from Oppenheimer. Your line is open.

Rob Painter:

Good morning, Kristen. This is Rob, and thanks for the question. So, coming into Q1 and thinking about the guide at the company level, what I would want you to hear is the momentum we have with the ARR and the overall business and the stabilization of the supply chains throughout most of the hardware businesses, which reflects in the total year guide. With respect to the first quarter specifically within the current Resources and Utilities segment, some of this is a quarterization topic, and then when we double click within that, within the Ag business specifically, there's two dynamics to consider

Rob Painter:

Yeah. I'm glad you asked that question, because the work that we're doing around TC1 and currently within the B&I segment, soon to be, you'll hear me talking about it with AECO moving forward, architects, engineers, construction and owners, and the digital transformation work that we've been undertaking, people, process, systems work over these last few years, it's really been vastly proportionate to this construction -- overall construction software part of the business. And really, we see it as the template for the rest of the company. We see it as the tip of the spear. There's a lot of work that's gone into it. There's also a lot of learnings that have come along with it, and I mean that in a very good way. The success of what we see in those bookings is demonstrable proof-point, that the strategy works. So, as we think about taking that into other parts of the business and we look forward, let's say, into the future field systems part of the company, what we saw is -- in the quarter is, that we're growing ARR at a double-digit clip in those businesses. And so, we can already take some of the ideas and frameworks around TC1 into other parts of the business. For example, bundling of our correction services -- positioning services with the hardware products that we have. We've been undergoing some model transitions in some of the hardware businesses, where we can separate value between the underlying hardware and then have a subscription or a term license on top of that. So, it's a -- there are things that happen in parallel. It's not perfectly serial, but for sure on the AECO software side of the business, that is a great template for us, and it has certainly been working so far.

Operator:

Your next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.

Rob Painter:

Hi, Jerry.

Jerry Revich:

Rob, why don't we just talk about, given the organizational change, obviously you laid out the restructuring savings and opportunities, can you comment on just beyond restructuring? How has the P&L responsibility shifted at all? It sounds like there are more changes beyond just cost savings. I'm wondering, if you could just expand on that. You alluded to cutting back, I think, on some lower ROI projects. Can you just talk more about the opportunities of the realignment beyond cost savings?

Jerry Revich:

Thank you, Rob. And separately, can I trouble you folks just to flesh out the performance of Transporeon for us? Exiting the fourth quarter, what was organic growth, logo growth, retention rates? You mentioned bookings were good. Can you just expand on some of the quantitative numbers on the performance entering '24?

Jerry Revich:

Thank you, Rob.

Jonathan Ho:

Hi. Good morning. Just wanted to get a little bit more color on your thoughts around, I guess, the macroenvironment as it relates to your guidance and the potential impact to, I guess, the organic growth outlook as you start to look to next year?

Jonathan Ho:

Excellent. And just as a follow up, can you maybe help us understand where we are in terms of the distribution partnership realignment? And what does the opportunity look like just given the divestiture coming up and just the changing nature of your positioning within the space? Thank you.

Jonathan Ho:

The Agriculture segment of it.

Jonathan Ho:

Great. Thank you.

Tami Zakaria:

Hi. Good morning. Thank you so much. So, at the last Investor Day, I think you had a slide, you expected about 20% of revenues transacted through the connected digital platform by 2023, and that would go up to 70% by 2024 and 90% by 2025. I know, you're hosting another Analyst Day probably this year. So, where are you in that journey now in terms of getting revenues through that platform?

Rob Painter:

And those priorities, if I can add to that to build on David's comment, is for sure to continue on the software businesses as the priority for the work.

Tami Zakaria:

Got it. That's very helpful. Thanks, David and Rob. The second question I have is, I just wanted to understand the operating margin guidance for this year better. I think, excluding the Ag JV, it seems like you expect about 80 basis points to 180 basis points of operating margin improvement this year. What is really -- what are the building blocks of that? How do you really get there? And also, what is the impact of that 53rd week, if any at all, on that margin guide?

David Barnes:

Yeah. So, as Rob said, structurally, our recurring revenue businesses are higher gross margin, you can see from disclosure, it's about 80% gross margin on the recurring revenue streams versus about 50% on the product stream. So, a lot of the roughly 100 basis point to 200 basis point margin improvement become -- flows directly from the ongoing mix shift of the business. With regard to the 53rd week, we quantified that that'll have about an $85 million revenue benefit for the year, all in the last quarter. The one thing I'll say though, is that's not the only discreet factor that's impacting our business. As I mentioned in my remarks, our business with big government customers, particularly the U.S. federal government, is lumpy from year-to-year. We talked about that as being a good factor earlier in 2023. So, that'll work against us. And then, we're doing model conversions focused on the software that's bundled with hardware. So, if you actually take the change in the federal business and the impact of the model conversions added to the 53rd week, they roughly offset each other. So, my way of looking at the underlying growth momentum of the business, I would say the 53rd week is a positive. Those other factors offset that positive and they're relatively neutral.

David Barnes:

Sure.

Unidentified Analyst:

Great. Good morning, Rob. Good morning, David. This is actually [Devin] (ph) on for Jason today. Thanks for taking our questions. I want to start with the construction software business. Nice to hear bookings growth exiting at more than 30% over there. Really strong results. Maybe looking at 2024, seems like macro could be improving and TC1 really seeing strong traction there. How are you kind of thinking about bookings growth to trend for 2024 and any additional maybe puts and takes you can kind of give us on how the different sub-product group would kind of perform for the year?

Unidentified Analyst:

Got it. No, that's very helpful color. And then, just a quick follow-up on TC1. It seems like things are really picking up over there. I want to ask, are you still mainly seeing adoptions among existing customers that are opting for TC1? Or are you seeing more new customers kind of adopting that product? And then, in terms of kind of the ASP opportunity, are you still kind of seeing the 2 to 3 times uplift that you kind of highlighted at your Analyst Day from TC1?

Unidentified Analyst:

Great. Thanks for all the details.

Chad Dillard:

Hi. Good morning, guys. So, I wanted to go back to your question about the adjusted operating margins, and I was hoping you could bridge from '23 to '24. Just trying to understand like the moving parts of cost savings mix, operating leverage and more specifically, the impact of the AG divestiture.

Rob Painter:

And if I can build on David's comment, which is exactly right, in that capital allocation call. So, the capital allocation call within the P&L to continue to put that go-to-market OpEx into the AECO space. One of the things I should have said in the response to one of Devin's questions was when we look at the net retention ratio, we're near 110% in the AECO part of the business. It's a terrific, terrific outcome that the team is driving. We look for -- what's an instructive measurement for us is looking at the customer lifetime value divided by the customer acquisition costs. And what that data is telling us is that we're well above three on that is -- that tells us that is a place to continue to put OpEx into. You don't get an ROI on that OpEx in year one. So there's, call it, a trade-off there is that we're playing the long-term game to continue to fuel that bookings growth, which will generate long-term sustainable ARR growth, and of course, overall revenue growth.

Rob Painter:

Yeah, Chad, I'm glad you asked that, and that's a good question. And let's take the what we are calling field systems now. So think of that as the -- in the old segmentation, the Geospatial businesses that we have, predominantly the one you'll know the best is survey, and then we have the machine control business that distributes through our SITECH that traditionally have gone through the B&I segment. So those come together under Field Systems, Ron Bisio is looking after that. I'll give you a demonstrable evidence of a change that we already made. We have one person responsible for sales now for all the Field Systems. One in APAC, one in the Americas, and one in Europe, Middle East and Africa. So, one person in each to call that three. And that would have been six people, because we would have had that duplicated just a few months ago. What that does, beyond just driving some -- just efficiencies that you could expect, it actually also allows us to rethink the allocation of how we use resources. That frees up some capability for us to put time and effort and money and people into ongoing dealer development. So, beyond the chase, the short to mid term numbers is actually having resources that can help our dealers think about a long term business. In some cases, Chad, we have dealers who cover multiple businesses for Trimble. Some do both civil and survey, some do ag and survey, some do ag and survey and civil. And with one set of eyes or one set of accountability overall of those is we can make more cogent decisions about how we make natural trade-offs that will happen between the portfolios. If I look at the product -- that's the go-to-market. If I look at the product side, what it unlocks is, I'd say, more efficiency in how we think about measuring the hardware SKUs that we have. Over the last few years, we've reduced the SKUs by 10% in the company. That drives simplification and underlying systems. We have one view on our GNSS portfolio, for example, that goes across the business, one point of view now on the total stations and the scanners that can be used across multiple parts of the portfolio. So, I think it drives just a lot sharper portfolio thinking when we look at it at the product lens. So, we put that product lens together with a go-to-market lens, and I think that positions us well. I think, this is -- I think, it was time to do it, and the announcement of the JV gave us a reason to really rethink how we did things and to move fast to put it in place. And the teams, they did all the planning work in the fourth quarter and they've come out of the gate, I'd say, quite strong here as a team, as an aligned team with a defined set of OKRs, objectives and key results, that we've defined by each of these major businesses.

Operator:

Your next question comes from the line of Joshua Tilton from Wolfe Research. Your line is open.

Rob Painter:

Well, good morning. Hey, thanks for the question. This is Rob, I'll give you the lens I have on it. I think about two axes on this one. One axis is the financial profile of the business, call it, the -- yes, there's a short-term view on the profile and then there's a long-term profile view on a business. And can it meet the expectation of returns that we have, whether it's return on invested capital or accretion at an ARR growth or at an EBITDA level. On the other axis, we'll look at the strategic attractiveness of that. That could involve the competitive position, but it also looks a lot at an individual businesses or product, let's say, capability to make the whole stronger. And if something sits on its own and isn't making the whole of the business stronger, so it doesn't contribute to a stronger Transportation business or a stronger Construction business, then it's not in the -- let's say, in the favorable side -- it's on a less favorable side of my 2x2 that I'm laying out, and the financial one speaks for itself on that 2x2. So, if I look and apply it against the portfolio, one of the things, if I take Field Systems as an example, within that, going back to the financial crisis back in 2008, there was a time when we had to step in and be the ballast for some of the dealers at the company. And we came in and we acquired a few of the dealers. But we're not ultimately long-term the best owners of a distribution business. We really think that belongs with entrepreneurs out in the field, very, very local businesses. So that would be an example of the divestiture we talked about here in just actually the last few weeks, as an example. So, we would look for parts of the business like that, that really we don't see ourselves as the best owner. So, I'll comment there as opposed to specifics within each of the businesses. But I think we can demonstrably say that we've had the courage to take a look in the mirror, as evidenced by 21 of the divestitures in the last few years driving this simplification and this focus, because we think that that drives the efficiency and the output and the outcomes for the company.

Rob Painter:

Yeah. So I'm going to stay pretty high level on that because, I think, it'll be more appropriate to take that view when we do the next Investor Day. On the slide, I think it's Slide 5 in the presentation that was attached to the prepared remarks, we did give a sizing of AECO Field Systems and Transportation and Logistics, sizing from a view, and it's plus or minus on the revenue for 2024, and maybe more instructively, at the -- with the software breakdown and the recurring revenue breakdown within each of those segments that we'll have. What I can say on top of that, at company level and what we've talked about in the past is we think we can continue to drive the double-digit level of growth of the annualized recurring revenue. And so, that's number one or two on the top strategic priorities I've got for the company. Field Systems makes up the hardware businesses. That's one, I think is instructive to look back to 2019. And if you look at that longitudinal growth of the CAGR over that timeframe, it is in the range of what we have put forward at prior Investor Days in terms of, call it, at a four to 6%, depending on which part of the business, the survey business we've historically talked about at 4% to 6% level, with some of the other hardware being a little bit higher. But that's what compromises that. So you could look at that past data and I think that 2019 to 2023, or you could extend it into 2024 view, fits within the range. We've got that. And obviously, it's been up or down and the standard deviations have been high within a quarter-to-quarter view. That's why we think it's instructed to look at a long baseline view. And then, you'd come to the Transportation business and what's new of course, since the last time we would have done in -- an analyst model or an Investor Day, would have been the addition of Transporeon into the portfolio. So, I'll give you that view to start with, and let's stay tuned. But maybe one thing that's -- an additional thing I'll say that could be interesting is when we last did the Investor Day, we said by -- if you did the math by 2027, that we would be a 60% recurring revenue business. And if you take David's prepared remarks and guide at a pro forma level, we think we'll be there in 2024. I'll leave you with that.

Operator:

Your final question comes from the line of Rob Wertheimer from Melius Research. Your line is open.

Rob Painter:

Yeah, Rob, thanks for the question. So, let's take them in order with the bookings growth in the fourth quarter, and what is still a difficult market overlay. I think it demonstrates the value proposition that the technology provides, and I had a chance to go to our customer conference in Barcelona in September, and what you see in a room like that, and what you can see on the PowerPoint slides are some of the very largest logos in the world who use our Transporeon technology. It's really quite impressive, whether it's retail or CPG, or packaging or building construction materials. When you look through the different verticals, it's really an impressive array of companies and a difficult market environment while companies can be reluctant to either spend the money or to spend the organizational effort to make a change, to do something different, the fact of the matter is that we can drive efficiencies and productivities -- productivity into our customers. What we see is that our win rates are as high as they've ever been. And so to us, that's an important factor in how we think about the business. And the control of what you can control, and not losing market share is an important metric. And we think that the bookings, while they're less than we would like on an overall annualized basis, I'll be clear on that, within what we've got, that they are showing that we're holding, if not gaining share in the market. So, I do have my gratitude to the team for delivering that and fighting it out every day. And you asked about the spot contract mix and what could that look like on the other side. It's like I heard Jamie Dimon, when asked what's the definition of a recession, he said, it's something that happens every seven years. So, take some version of that quote. If it was actually true, take some version of that quote. We know that the freight markets go up and down. So, the market will -- and it does show signs of having stabilized. Now stabilized is different from increasing. What we can see over a long baseline is that the business out of freight recessions has accelerated strongly coming out of that. And it makes sense, and it's a consumption-based model, is that we would expect if the market inflects, and I'm not making a call that it will inflect in 2024, to be clear, as it inflects, the business just naturally can significantly increase the level of revenue that comes through. And I'd say at a strong double-digit level is what I would expect that to move to. And then, last you asked about at the OEM level and the de-emphasizing of the hardware. I'd say the hardware in the Transportation segment is quite different than the hardware around the rest of Trimble. There is less differentiation in that onboard compute, and these days even more of our own in call them, in-cab hardware devices are close to commercial off the shelf tablets. So, making our own hardware years ago was a unique, differentiated factor and it seamlessly integrated into our full software offering, and you are kind of like one throat to choke, offer the full solution. As that technology landscape changed, it's just not a great place to be. We refer to it internally as the lower calorie -- low-calorie revenue, because there's just not attractive margins or [indiscernible] margins with all of the hardware. Not all of the hardware is equal, but at that OEM level, if OEM wants to value engineer the lowest cost hardware, it's just not a place, I think we're going to ever be the best doing that at some kind of global scale. Thus, looking at the data integration. When we look at the data, OEMs have one set of data that they're interested in, which is frankly different than what customers are interested in to run their businesses. That is to say that data on machine health is extraordinarily valuable to the OEMs. And by the way, it is important to customers, but it usually comes to customer service agreements, whereas customers operate mixed fleets of equipment and the customers are trying to drive their own productivity and efficiency and safety and visibility, and to operate within whatever installed base of technology that they've got. And so, we think that data feed will continue to be necessary both at the -- for the OEM level, but also you need to be able to provide a gateway, so to speak, to be able to bring the customers on to a more fully functional, in this case, telematic solution. And by the way, whether that's Trimble or not Trimble solutions, I think that would be true for the market to have that flexibility. So Rob, I hope that helps provide some color.

Operator:

Thank you for standing by and welcome to the Trimble Third Quarter 2023 Results Call. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I’d now like to welcome Rob Painter, Chief Executive Officer to begin the conference. Rob, over to you.

David Barnes:

Thank you, Rob. Let’s start on Slide 4 with a review of third quarter results. Third quarter revenue of $957 million was up 8% in total and up 2% organically. Changes in foreign exchange rates increased revenue by 1%, while acquisitions net of divestitures increased revenue by 5%. Subscription and recurring revenue continued to grow at a strong rate. As Rob mentioned a moment ago, the weakening macro environment adversely impacted customer sentiment and demand across all of our hardware end markets. Gross margin in the third quarter was a record 65%, up 410 basis points year-over-year, driven by an increasingly favorable business mix and the ongoing net impact of pricing and reduced input cost inflation. Adjusted EBITDA and operating margins also expanded year-over-year due to the progression in gross margins and the benefit of cost reduction actions we took early in the quarter. Net income dollars increased by 4% and earnings per share grew year-over-year to $0.68, exceeding the high end of our prior guidance range. We are very pleased with our margin performance in the third quarter, delivering strong bottom line results even in the face of a tougher macroeconomic environment. Turning now to Slide 5, I’ll review in more detail our third quarter revenue trends. On this and the next few pages, I will focus on organic growth rates, excluding the impacts of acquisitions, divestitures and currency fluctuations. ARR was up 13%, driven in part by strong bookings across our construction software businesses. Our digital platform work is enabling cross-sell of bundled solutions. Our non-recurring revenue streams, including hardware and perpetual software, contracted by 8% year-over-year and came in below our expectations. The macro environment worsened late in the quarter across many of our hardware end markets with weakening customer sentiment and propensity to invest. The impact was especially visible in Europe, where macro trends are the most difficult. From a geographic perspective, North American revenues were up 5%. In Europe, revenues were down 1%. Moving to Slide 6. Our cash flow from operations was $147 million with free cash flow of $134 million, both of which are up significantly versus prior year. Our cash flow in the quarter benefited from lower purchases of inventory, lower tax payments and higher profitability. The working capital dynamics of our business remains strong with negative net working capital. We entered the fourth quarter with $1.6 billion in backlog inclusive of ag committed backlog expected to ship before our ag JV transaction closes. We project that $1.1 billion of our backlog will be recognized as revenue within the next 12 months. We ended the quarter with leverage measured as net debt to EBITDA of 2.9x, reflecting the repayment of $115 million of net debt during the quarter and repayment of $270 million since the closing of the Transporeon acquisition. Note that we are ahead of our time line to pay-down our Transporeon debt with leverage going below 3x one quarter ahead of the commitment we made when the deal was announced. Finally, I’ll repeat what Rob mentioned earlier. During the quarter, we reached an important milestone with half of our revenue now coming from recurring revenue streams. The formation of our ag JV will further accelerate our business in the direction of majority recurring revenue, making our business both more predictable and more resilient. Let’s turn now to Slide 7 for additional detail on each of our reporting segments. Buildings and Infrastructure revenue was up 6%. Revenue growth was strong across our software businesses in the segment with double-digit year-over-year ARR and revenue increases at e-Builder, Viewpoint, SketchUp and Tekla. This broad-based growth reflects the success and momentum of our Connect and Scale strategy, evidenced by growing bookings, especially of larger and broader bundles. Our Civil Construction business was down year-over-year at a high single-digit rate as the demand environment weakened among dealers and end customers. Geospatial revenue was down 2%, reflecting lower demand across many survey end markets. One bright spot for our Geospatial business in the quarter was with our U.S. federal government customers, who continue to place orders well ahead of prior year levels and above our expectations earlier in the year. Resources and Utilities revenue was down 4%, reflecting both declining farmer sentiment and the impact of our distribution network changes. Revenue declines were most pronounced in Europe, which makes up the largest portion of our ag hardware business. Partially offsetting the weakness in hardware demand, we experienced double-digit segment ARR growth in Positioning Services, forestry and Cityworks. Financial results in our Transportation segment showed progression in a number of areas. Organic ARR was up at a mid-single-digit rate and margins expanded for the seventh quarter in a row. On the other hand, our mobility business in North America has not seen the uptick in bookings that we originally expected. With planned chart notifications in the quarter, our Transportation segment ARR momentum will moderate going into next year. Transporeon top line trends remain below our expectations when we bought the business, driven almost entirely by a contraction in overall industry shipment volumes and the depressed spot market. Importantly, we have maintained our customers and our market share. And with our transaction-based recurring model, we are positioned to recover with an improvement in the overall European goods economy when the inevitable upswing takes place. The Transporeon team has managed costs well in this tough environment, and our operating margin since the deal closed remained in line with our original expectations. Moving to Slide 8, I will now discuss our guidance for the fourth quarter and the full year. Our third quarter results reflect a weakening demand environment. We expect this weakness to extend through the fourth quarter and into next year. We now project fourth quarter revenue between $890 million and $930 million. Our fourth quarter outlook reflects 13% growth in ARR, offset by a decline in our hardware and perpetual software at a low to mid-single-digit rate. This yields a full year revenue outlook of $3.76 billion to $3.80 billion. A significant majority of the reduction in revenue outlook is in our hardware businesses with the biggest impact in Civil Construction Hardware. For perspective, it is helped to look back to the pre-COVID period to determine the underlying long-term trends of our hardware businesses. All three of our core hardware businesses, Geospatial, Agriculture and Civil Construction, have grown at a compound rate of mid-single digit or better since 2019, and our fourth quarter guidance reflects a continuation of this long-term trend. We project that the combined impact of higher gross margins and lower operating expense versus our prior outlook will offset much of the impact of our lower revenue forecast, resulting in an EPS range for the fourth quarter of $0.55 to $0.63. Our updated full year guidance for EPS is $2.58 to $2.66. Fourth quarter operating margins are projected to be in the range of 24.5% to 25%, a meaningful improvement from year ago levels, but sequentially down from the third quarter, driven primarily by mix. Within the overall outlook for the fourth quarter, we anticipate the following segment trends. Buildings and Infrastructure will remain our strongest segment with organic revenue in the quarter accelerating from third quarter levels to the mid- to high single digits. Even in the current macro environment, we see strong demand for our software offerings, while our hardware businesses are expected to be down at a mid-single-digit rate. Geospatial segment revenues are expected to be down at a low to mid-single-digit rate in the fourth quarter. Gradual improvement across some areas of our core field survey business will be offset by lower sales in the fourth quarter to the U.S. federal government. Geospatial margins in the fourth quarter will come down sequentially from third quarter levels due to a less favorable business mix. Resources and Utilities revenue are expected to be flat to down at a low single-digit rate. This fourth quarter outlook reflects both the adverse overall demand environment and the impact of our ongoing aftermarket dealer network transition. ARR growth in the segment will remain at a strong double-digit level. Transportation segment revenues will be flat or down modestly as the impact of higher customer churn in our North American mobility business offsets the growth across the rest of our transportation offerings. This outlook assumes no meaningful improvement in Transporeon’s core European transportation market in the fourth quarter. From a cash flow perspective, we expect full year 2023 free cash flow in the range of $530 million to $555 million. Excluding the impact of full year transaction-related and restructuring-related cash outflows of approximately $100 million, this outlook represents free cash flow of approximately 1x net income. With our strong year-to-date cash flow performance and with contractual certainty on the upcoming close of our Ag JV transaction, we plan to reinitiate share repurchases in the fourth quarter. Consistent with past practice, we plan to issue guidance for 2024 at our fourth quarter earnings release in February. At this point, our outlook for next year can be characterized threefold. First, we expect that organic revenue growth trends will be better than those we posted this year as our hardware business has stabilized following the declines of 2023 and as recurring revenue sources make up a growing proportion of our total revenue base. Second, we believe ARR will continue to grow at a double-digit rate. Even in the context of a tough macro environment, our bookings and net retention performance continue to support this outlook. Third, with the cost reduction actions we are taking, we expect to hold or improve EBITDA margins even with the impact of the close of our AGCO deal. This outlook leaves us on track to achieve the EBITDA margin goals we put forward in our Investor Day last year. Rob, I’ll turn it back over to you.

Operator:

Thank you for the presentation. [Operator Instructions] And your first question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.

David Barnes:

Thanks, Jerry.

Rob Painter:

Hi. Good morning, Jerry and thanks for the question. This is Rob. I’ll take it. Actually, the bookings for the software businesses and construction continue to be strong in the third quarter. The ARR growth in the B&I segment was over 20% for the quarter as well in Q3. So actually, I see continued strengths into the fourth quarter with our view on ARR growth in that segment. So actually, I would say really the narrative holds there. FX is a bit of a headwind to the ARR growth that will be posted at the top line. So adjusted for that, I think we remain on track.

Jerry Revich:

Okay. So FX is a key driver then. Okay. And then can we shift gears and talk about the margin trajectory, given that performance in the quarter and exiting the year. I know we’re not talking about ‘24 guidance yet, but it feels like you’ve got margin tailwinds versus the run rate in the first half of 2023. So as we think about the puts and takes around what ‘24 might look like, obviously, some end market challenges. But it feels like, at least on a year-over-year basis, there should be some margin momentum. I’m wondering, if you wouldn’t mind commenting on any other puts and takes we should keep in mind?

Jerry Revich:

Super. And lastly, can you just comment on leading indicators within Transporeon? I don’t know if you folks have visibility based on that business in terms of customers prepared shipping plans or anything along those lines. And how are you thinking about fourth quarter seasonally for that part of the portfolio?

Rob Painter:

And Jerry, if that’s the macro. When I look at the micro to complement that, we have 100% customer retention and our win-loss ratios are holding. So our market share is holding in the region. I think that’s important to keep in mind as well for the underlying health of the business.

Operator:

Your next question comes from the line of Rob Wertheimer from Melius Research. Your line is open.

David Barnes:

Hey, Rob, it’s David. I’ll take the dealer inventory question first. We did see a very meaningful inventory destock in the first half of this year, particularly in the first quarter. You probably recall, I said we estimate it was about $40 million in the first quarter, less than that in the second quarter. It’s not really a factor in the back half of this year. Actually, in some of our end markets, dealer inventory went up by just a little bit in Q3. The one change we’re seeing, and Rob referenced this in his remarks, is that on the civil side, we’re seeing the set point, the desired inventory level for our dealers has actually come down. That reflects higher interest rates, so higher cost of carrying inventory. It reflects the uncertainty about the demand market and frankly, our very good product supply. So the need to hold inventory is less than it was. So that won’t be helpful to us. I think we will see a modest correction. Nowhere near like Q1 and Q4. We’re talking in the $10 million to $20 million range. But we think dealer inventories in aggregate are close to where they will be over the longer-term.

Rob Wertheimer:

Thank you.

Rob Mason:

Hi. Yes, good morning. Just to go back to the expectations around overall ARR. Like you said, it did not sound like there is much movement in your outlook around the B&I related to ARR. What about transportation? Should we expect that, that still tracks up mid-single digits, the track that it’s been on?

Rob Mason:

Understood. Okay. Maybe just as a follow-up then. I understand you don’t want to speak too broadly about 2024, and this may just be somewhat of a transitory dynamic with the AGCO transaction coming up. But just how should we think about the ending of the CNH aftermarket agreement and the impact relative to your efforts to try to backfill that. Obviously, AGCO is a solution. But until that transaction closes, I’m just curious how to think about modeling that impact next year.

Rob Mason:

Is there a way, Rob, to isolate how much – there was some reference to the distribution transition in the third quarter, how much impact that’s causing the R&D segment today?

Rob Mason:

Makes sense. Thank you.

Jonathan Ho:

Hi, good morning. Just wanted to, I guess, better understand sort of your commentary around the bundling opportunities in the B&I business. Can you maybe help us understand maybe what the customers are seeing as they are starting to adopt Trimble One and some sort of your broader platform approach and maybe what that means from an upsell and ASP opportunity perspective?

Jonathan Ho:

Got it. And then just as a quick follow-up. Can you give us a bit more color on how the machine control as a service business is trending? And how those deals sort of work and whether this can help customers in a more cost contained environment? Thank you.

Jonathan Ho:

Thank you.

Charles Dillard:

Hi, good morning, guys. So I just wanted to double-click on the cost cuts that you have highlighted in your prepared remarks, $40 million. So first of all, are you expecting that to hit full run rate in 2024? Second, can you give a little bit more color on how it’s allocated? And third, how much is structural versus variable?

Charles Dillard:

That’s helpful. And then second question is just trying to understand how resilient the B&I business is to slow down. Maybe you can break it up into two parts, software versus hardware. Software sounds like based on bookings, it is relatively resilient. But I would love to understand like how long the contract duration is and how to think about that? And then on the hardware side, just try to think about significant amplitude there?

Charles Dillard:

Great. Thank you.

Kristen Owen:

Hey. Thank you. Good morning. I appreciate you taking the question. I wanted to follow-up on some of the B&I commentary and just given some of the success that you have noted in becoming easier to do business with. I am wondering if you can speak to market share versus wallet share gains. How much of the growth are you experiencing is coming through customers just using more Trimble products versus maybe any shift in the competitive landscape, or are you merely just tackling white space there?

Kristen Owen:

That’s really helpful. Thank you, Rob. I am going to shift gears a little bit. You talked about the macro environment, some of the headwinds facing the transportation business. But at 18.2% operating margins, this is the highest segment operating margin that you printed since before the ELD Mandates. So, I am wondering if you can talk a little bit about maybe what’s working on the cost side of the equation for that business, how much of that is uplift from Transporeon versus some of the hard work that you guys have been doing over the last couple of years? Thank you.

Kristen Owen:

Thank you so much.

Operator:

Your next question comes from the line of Jason Celino from KeyBanc Capital Markets. Your line is open.

Rob Painter:

Hey Jason. Thanks for the question. I would say it depends on the size of the customer between the hardware and the software. And not surprisingly, in the small to mid-market, we are doing more with the C-levels of our customers. And then I would say the bigger the customer, the more it’s segmented across the company who is the economic buyer. Let me say something I think strategically your question unlocks is the nature of moving from selling more point solutions to selling connected offerings. Because what we do see happening as increasingly as you should make that shift from the point solution to the connected offering, you are doing more account-based selling. It is a fundamentally different approach on the go-to-market side of how we sell and who we sell to at our customers. So, historically you might have had – you could have had the virtual design and construction department deciding on some technology, then they are going to use. You can have field crew deciding which hardware machine control or survey kit they want to use out in the field. As we move to these bigger offerings, the nature of that is actually, the dollar amount becomes higher even as we move this to – from the perpetual over to a subscription basis. And we see it from the uplift when we see, when we can bring customers who are already subscribing to us and now who are taking bigger part of the portfolio, we see where we get a multiple uplift. But naturally, as those dollar uplifts go higher, we are starting very often to work with the different set of people within the organizations and within our customers. Now, that level often has already been using and been the customer at that ERP level because who is typically buying the ERP is going to be more of the CFO type who is buying that. So, now when you think about it, we are able to go to that person with the bigger offering. That’s a different sales motion for us. And so actually, we see that as a very positive thing for us, is changing the nature of the economic buyers when we are offering a solution.

Rob Painter:

Oh, I see what you are asking. That’s a good question. I have to – let’s say let me think more about that and come back with a more data, a fact-based answer on that. We have been looking more at the nature of the end markets that are being served and those who do more residential work or infrastructure work. I mind you, many contractors do both kinds of work. If you are a civil contractor, you are – have to be buying more Trimble software that’s going to be set your business. If you are doing residential construction, you are doing more single-family construction, you are not buying a Trimble ERP. It’s too big for you if you are doing that kind of residential construction. By the time you are doing multifamily, there is a set of additional technology becomes more applicable. So, probably I am answering your question now as I talk about that out loud.

Operator:

Your next question comes from the line of Joshua Tilton from Wolfe Research. Your line is open.

David Barnes:

Hi Josh, it’s David. First of all, I would say that we are seeing that in the software business where Rob mentioned the 30%-plus bookings in our construction software business, ARR is still really strong, growing at 20%. So, that business is benefiting from the clear path to value and Rob mentioned labor constraints that our construction customers have and software technology being needed. The hardware side is more – I will point out within B&I, our hardware is sold to civil contractors, so it’s a more narrow range of customers then buy our software. And the sale of our hardware for that segment is driven by, to use Rob’s, moving dirt. And while the infrastructure dollars are going up, if you take the inflation and back that out, labor and materials cost inflation, the actual amount of dirt being moved has not risen much over time, and that’s the fundamental driver of our B&I hardware business. So, the demand of the actual – for technology to moving the earth isn’t – hasn’t grown as much as we had anticipated. But the need for productivity has grown and our software offerings are geared to meet that need, and that’s where we are seeing the growth.

Joshua Tilton:

Super helpful. And then just a quick follow-up, I wanted to maybe to the extent that you guys can provide it, just any more color you can give us on the churn in the Mobility segment. It feels like when we talked about it in the past, it felt more like it was isolated to that specific order and now maybe it’s feeling just a tad more structural. Any more detail you guys can provide us there?

Joshua Tilton:

No problem. Thank you.

Clarke Jeffries:

Hello. Thank you for taking the question. In interest of time, I will keep it to one. I think David may have answered a part of this, but I wanted to kind of further clarify. When you think about the B&I portfolio and the relationship between dollar growth in moving dirt, is it fair to say that a lot of the ARR products, you can still capture opportunity when projects are going through engineering and procurement, but stop at that shovel ready stage due to the input costs. I wanted to understand as we think about maybe the next 12 months and the cyclical factors in construction, ARR versus hardware and whether if more projects come into this sort of paradigm, what part of the portfolio might outperform?

Operator:

This does bring us to the end of our Q&A session for today. I would like to thank our speakers for the presentation, and thank you all for joining us. This now concludes today’s conference. Enjoy the rest of your day. You may now disconnect.

Operator:

Thank you for standing by. My name is Maria, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trimble Second Quarter 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Rob Painter, Chief Executive Officer. Mr. Painter, please go ahead.

David Barnes:

Turning now to slide 5 second quarter revenue of $994 million grew three percent organically. Revenue was above our expectations coming into the quarter, driven by the earlier-than-expected shipment of the large order of Geospatial equipment to the Federal Government that Rob mentioned earlier. Excluding that, revenues for the quarter were in-line with our projections. Our total company revenue growth versus prior year was driven by recurring software, both organic and from the addition of Transporeon. Gross margins were strong again in the second quarter, with non-GAAP gross margins of 64.2% tying the record levels of the first quarter. Our gross margins in the second quarter reflect favorable price/cost dynamics, strong growth of recurring software revenues and a higher margin mix within our product offerings. EBITDA margin of 25.3% in the second quarter was up 110 basis points year-over-year, benefiting from our strong gross margin performance. Operating and EBITDA margins continue to grow versus prior year, even as we lap strong year-ago revenues and as we continue to invest in our digital transformation. Cash flow in the second quarter improved on a year-over-year basis even taking into account Transporeon deal-related expenses. Our improved cash flow performance was the result of lower purchases of inventory, lower tax payments, and higher profitability. Our capital allocation priority remains debt repayment. And we made progress through the quarter on reducing our leverage. Turning now to, slide 6 for some additional color on our revenue performance. Product revenue, which includes both hardware and perpetual software, was down 5% organically in the second quarter and was aided by the federal order, which we had previously expected to ship in the third quarter. The year-over-year decline in product revenue this quarter reflects a difficult comparison with the second quarter of 2022, when our supply chain was freeing up and we were working through high hardware backlog. As expected, dealers reduced their inventories in the quarter. We expect some modest amount of additional dealer inventory reduction over the balance of this year. Our subscription and services revenue, which includes SaaS, term licenses, maintenance and support, recurring transactions and professional services, was up 13% on an organic basis, largely driven by strong bookings and net retention performance across our Buildings and Infrastructure software businesses. From a geographic perspective, revenues in North America, Asia Pacific and the Rest of World were up organically, by 3%, 11% and 18% respectively. Rest of World revenue growth was driven by strong demand for precision agriculture products from customers in Brazil. Revenues in Europe declined organically by 4%, as adverse macroeconomic factors impacted many of our businesses. Turning now to results by segment on slide 7, our software portfolio in the Buildings and Infrastructure reporting segment, continued to perform well, with organic ARR growth of over 20%. Bookings of recurring software offerings in the segment grew at a mid-20s percentage rate, despite the challenges of transitioning the North American software businesses onto our new digital infrastructure during the quarter. These large system implementations are never easy, but our teams powered through the transition, while still keeping our growth momentum going. With this latest release of our digital transformation, we now have over one-third of our Buildings and Infrastructure ARR, transacting through a connected system, which will facilitate the acceleration of our Connect and Scale strategy. Segment revenues of products for civil construction customers were down at a mid-single-digit rate in the quarter, reflecting strong shipment momentum a year ago. In the Geospatial reporting segment, we experienced organic revenue growth driven by the $18 million shipment to the federal government mentioned earlier. Excluding this one shipment, segment revenues in the quarter were down at a mid-single-digit organic rate, an improvement from the performance in the first quarter. This segment is most impacted by the downturn in residential home construction in North America and Europe. We expect to return to organic growth on an ongoing basis in the fourth quarter. In the Resources and Utilities segment, revenues were down year-on-year and fell modestly short of our expectations, driven by our agriculture business. While our sales to ag OEM customers grew versus prior year in the second quarter, revenue from our aftermarket channel was down. Three drivers help contextualize the aftermarket revenue decline. One, we are lapping a tough comp versus 2022 when our revenues surged as our supply chain freed up well ahead of the OEM supply chain. Second, the changes we announced a quarter ago and our aftermarket distribution network have, as expected, impacted our short-term revenue trends as we and our dealers refine our plans going forward. And third, we are seeing the impact from a softening of farmer sentiment, especially in Europe. We continue to see strong demand trends from ag customers in Brazil, and our positioning services business grew globally at a double-digit rate as we accelerated our cross-sell efforts. In the Transportation segment, we delivered 6% organic revenue growth, driven by our North American Enterprise and Maps businesses. Our Mobility businesses in Europe and Brazil also grew revenue and ARR at a double-digit rate. As Rob mentioned earlier, operating margins improved sequentially once again. Our Trimble transportation team has made good progress in turning this business around. And while there's more work ahead of us, we are pleased with the progress. I'll note here that segment results now include the Transporeon business. Transporeon performance was largely in line with our expectations for the quarter, notwithstanding a tough macro environment in the European transportation industry. Moving now to Slide 8. We ended the second quarter with ARR of $1.88 billion, up 14% organically. Remaining performance obligations, or RPO, our backlog, stood at $1.6 billion at the end of the quarter. RPO related to recurring offerings grew by over $100 million year-over-year as a result of our strong bookings performance. Product RPO came down as expected year-over-year, reflecting our improved lead times. With this high level of RPO, we have significant visibility into our revenue in the coming quarters. On a 12-month rolling basis, our software services and recurring revenue of $2.3 billion represents a record 64% of our revenues, up 800 basis points from year ago levels. We completed the acquisition of Transporeon in the second quarter and reduced net debt by $150 million from the closing of the acquisition through quarter end. We plan to continue to delever, and as anticipated, expect to finish the year with net debt less than 3x EBITDA. Turning now to our guidance on Slide 9. The midpoint of our guidance for full year revenue remains the same as we issued last quarter. Our revenue guidance range has narrowed to $3.845 billion to $3.925 billion, which represents organic revenue growth in the second half of the year in the mid- to high single digits. We continue to expect ARR to grow at a mid-teens rate for the year. Our expectation for gross and operating margins has increased from prior guidance by 50 basis points, reflecting the strong performance in the second quarter and highly focus on margins and cost control. The end result is an increase in the midpoint of our earnings per share guidance range by $0.03. We now expect full year EPS in the range of $2.57 to $2.73. From a segment perspective, our expectation for full year growth in the Buildings and Infrastructure segment has improved following strong performance in the second quarter. Our forecast in Resources and Utilities is down modestly from the outlook of a quarter ago, reflecting weakening macroeconomic conditions in the agriculture sector. The outlook for Transportation and Geospatial is unchanged from last quarter. For the third quarter of 2023, we expect organic revenue growth in the range of 0% to 5%, which corresponds with a revenue range of $945 million to $985 million. We expect gross margins of 100 to 150 basis points lower than the second quarter, reflecting a less favorable business mix. We expect third quarter operating margins will be similar to second quarter levels. We project EPS in the range of $0.56 to $0.64. From a segment perspective, we expect Geospatial revenues to be down organically at a mid-to-high single-digit rate as we won't have the positive impact of the large federal order this coming quarter. Resources and Utilities revenue is expected to be down at a mid-single digit organically. Revenue in Buildings and Infrastructure and Transportation are expected to continue to grow organically in the third quarter at rates comparable to or better than we experienced in the second quarter. Back to you, Rob.

Operator:

Thank you. [Operator Instructions] Your first question comes from the line of Kristen Owen with Oppenheimer.

David Barnes:

Sure. Hi Kristen. First thing I'll point out is that our business with the OEMs was up. So that's the good part of the story. The factors that I mentioned that caused our aftermarket business to be down year-on-year, a part of it is the macros. We see softening sentiment across many of the geographies is much more pronounced in Europe than the rest of the world, but we really see it in Europe. We've also changed our -- made announcement of changes to our distribution network. And so that's causing us and our dealers to sort of rethink our plans, and that clearly had a softening effect in the quarter. And then, we're just lapping really big numbers. Last year, we had really strong shipments as we were working through our supply chain. I'll point out our supply chain improved much more quickly than the OEMs. They get a lot more parts, more complex supply chain. So we saw the surge last year. It's a little tough to attribute, the causal nature of the aftermarket revenue decline to those three. It is a mix, and some of them are interrelated. But I think overall, the sort of long-term outlook remains positive, just as it was. We see these as -- all three of these factors is reasonably temporal.

Rob Painter:

Hey Kristen. Good morning, it's Rob. The transition is playing out mostly as expected. So, we feel good about where we are in this. It's obviously a process as we go around the globe, but we take an 80-20 principle as we work with our partners around the world from those that we're signing up. Thus far, I think there's very positive sentiment. This creates a closer connection to Trimble. It gets a broader portfolio of technology to take to market. So we're feeling good about it where we are, and there's still clearly a lot of work to be done. So I'd say, largely as expected so far.

Rob Painter:

Yes, this has been an extraordinarily successful business for us really for the last couple of -- I can argue in the last couple of decades. To get that 2-centimeter and less accuracy on a farm or for a survey or for construction equipment, by the way, for ADAS systems and on-road vehicles, you need to have corrections, because you have errors in the atmosphere, you need additional geometry -- ground-based geometry to augment the satellites. So we've been a market leader, a technology leader in this capability for a long time now, continue to actually find ability to innovate in this space. From a market share perspective, I'd say it's pretty clear, we're the market leader as our technology goes on in ag, it goes civil construction equipment and machine control, it shows up in surveying all places where we have the market share lead. So the correlation on to Trimble equipment correlates to the market share we have, I'd say, and beyond because you don't just have to be Trimble on Trimble and we are mixed fleet. On the on-road space, that became a new frontier, let's say, a new addressable market that opened up for us in the last few years as automotive companies start towards their path -- towards autonomy. It's a series of progressive automation. That's why you see ADAS picking up as one of the first applications. So to no absolute position for lane detection, you're going to need to have corrections like we have. So, that's an emerging market with -- that presents an expanded addressable market for us. In terms of actually sizing specifically the addressable market, I have to admit it's a bit hard to do that, but I would put it as a certainly approaching $1 billion type market opportunity when you put the on-road business in as well.

Operator:

Our next question comes from Mr. Jerry Revich of Goldman Sachs.

Rob Painter :

Hi, Jerry.

Rob Painter :

Sure, Jerry. So the pipeline within construction is quite strong. This team is firing on all cylinders at the moment. It showed up in the organic ARR growth greater than 20%, which is clearly better than the company number at the plus 14% level organically. Bookings were grew faster than the ARR growth. Bookings grew sequentially. You'd asked me about that last quarter. So now you work backwards from the bookings and into the pipeline and the coverage ratios, and we like what we see. We see strong pipeline, strong coverage ratios, the Trimble construction one offering continues to get momentum for our sellers in the market. We see strong cross-sell activity within those bookings as the pieces come together quite nice and overlay the market backdrop on that, and infrastructure in North America is clearly a positive catalyst for us in all of the markets. So generally, a favorable macro meets a team executing extremely well and turns into a pipeline, which turns into that ARR. On the Transporeon side of the house, we're four months into the acquisition. So it's still relatively new. We like what we're seeing in the business so far. So as I think about the people, I think about the macros, I think about the business and I think about the integration opportunities that we have there. Now the macro is still more challenging in Europe. It's a mass micro monetization business model. So it's fundamentally transaction-based or consumption-based and then the nature of the mix of that consumption impacts the revenue. What we think we saw in the quarter is that it looks like spot prices might have hit a bottom and time will tell. If that's the case, then the business model is there and poised to increase accordingly. From a customer perspective, from wins in the market, we don't lose customers in this business. We did have new logo wins in the quarter, continue to have bookings growth in the quarter. So I like the start that we have in the business.

David Barnes:

Yeah, sure. Jerry, one thing I'll say is that if you compare Trimble's trends with the OEMs, you have to keep in mind the year-on-year comps, including channel inventory, which are completely different for us. We work through our supply chain issues. In early last year, we saw the surge of shipment. Our channel inventories have been declining. That's not true for all the OEMs. The way I get comfort on the fourth quarter is from a couple of directions. First, from the bottom-up look at the businesses, the pipeline, the underlying trends. And then from a top-down perspective, I look at comparisons of our projections with the period before COVID in the supply chain. If you actually look at our organic growth going back to four years ago, so which is pre these disruptions. Actually, the fourth quarter compound organic growth is very comparable to Q3 and is actually consistent with what we've seen for several quarters. So it looks like a ramp-up, but when you take the noise of the supply chain-driven ups and downs from a year or two ago, it looks very achievable. So we're very confident in this fourth quarter outlook.

Operator:

Our next call comes from Mr. Chad Dillard with Bernstein. Please go ahead.

David Barnes:

Hey, Chad. First thing I'd say is that we're nearly all the way through the destocking. It won't be a meaningful factor for the back half of the year. There was some destocking in Q2. It was much smaller than Q1, so I don't really call that out as a major driver. But there's a -- it's not just the destocking this year. It was the increase in inventory levels last year that you're comparing against. So you've got to put those two together to compare our business trends with retail demand. And that's true across the markets we serve. From the segment perspective, the business where we think there has been some end user sales to retail or sales end user decline is in geospatial. That is the segment that is most impacted by residential construction, both in the United States and Europe. So that's been the softest. If you take the channel dynamics out both this year and last and the other businesses in ag and in civil construction, it looks like there's modest sales to retail growth even with the numbers we're posting. So that's kind of how we see it.

David Barnes:

Yes. So we got through the next phase of our digital transformation during Q2. We put our North American construction enterprise software businesses together on a common digital platform. And as I said in my prepared remarks, these big process and system changes are never easy, they can be disruptive. One of the things I'm most proud of with our team and our results is that we achieved nearly mid-20s-plus -- actually, and the businesses directly impacted by the digital transformation, almost 30% bookings growth, while the tools they use to track and sell have transformed. So that is a huge milestone. It's -- we are now in a position, only just now, to take advantage of the benefits that the common platform provides to us and further enhancements to that are going to roll out even this quarter. So we're getting to the point where cross-sell and the Connect and Scale vision is enabled and not hindered by diversity of systems. Now we have common technology. We have visibility into our pipeline. Salespeople can see what customer business is across the Trimble portfolio in ways that they couldn't systematically before. So we're just getting going. We're just beginning to realize the potential of this new process and tool for that business, and we will continue over the next year or two to roll out the same approach to the rest of our business.

Operator:

Our next question comes from Mr. Jonathan Ho with William Blair. Please go ahead.

Rob Painter:

Hey, Jonathan. Good morning. It's Rob. The TC1 so far has been, I'd say, a large success, and I think we're just getting started with it. I've had an example of a customer saying, okay, I used to have to have 14 different transactions with you to do business and now I can do it under one frame agreement. We're making ourselves easier to do business with. When we sign a frame agreement, let's say, with a customer who maybe is only buying one solution within TC1, if you sign the frame agreement, it's now easier to upsell. So that land and expand is more easily enabled because you don't have to go back and with a set of terms and conditions. Customers are able to connect workflows as we have tighter and tighter integrations in the data across the products and solutions that we sell to customers. So any surprise within TC1 to me as to the upside, it absolutely validates Connect and Scale and as the beacon for the rest of the company of what we can do when we rethink how we go to market and how we take our solutions to market. So I was very encouraged with what we're seeing in the business and proud of the team that's delivering it.

Rob Painter:

Certainly, let's split the two and then the slide that goes along with the prepared remarks that we made on purpose, put one distinction of the internal facing example separate from the customer-facing examples. So if we take the productivity opportunity internally, I think the place we'll see it show up first is within the R&D on the developer side with the copilot trial that we ran in the second quarter that showed some productivity benefits. I think this is going to be the way that business has done. So where I would like to believe that, we'll see this show up over time as we can get more scalability out of the resources we have. Said another way is, if this works, that turns into op leverage on revenue growth that we have in the future. So call it more scalability, more effectiveness -- and internal effectiveness and efficiency, which I think would ultimately manifest in op leverage or that marginal contribution on the revenue growth. On the customer-facing side, I think it's going to be very interesting to see how this monetizes over time. Right now, I would say, there's an aspect where we make the solutions we sell better. Trimble is a premium price provider in the market. I think this is part of earning that premium is continuing to innovate and develop and have the best. There's another aspect of capabilities, which we believe will come through when you're buying a bundle such as TC1 when you're buying that platform offering or that cloud offering, such that if you have a, I'll say, an incremental set of analytics capabilities, we want to deliver them when you're buying something like TC1, so where you can uniquely get them by virtue of that business model. I suspect that that's going to be the way that we'll see this monetize. I think standalone analytics, I have a question if those will actually be able to monetize independently and on their own. I really think it comes through making our solutions better.

Operator:

The next question comes from the line of Tami Zakaria with JPMorgan. Please go ahead.

Rob Painte:

Hi, Tami, good morning, it's Rob. Let's take that in here slices within B&I. Within B&I, you know, we have the civil construction -- fundamentally, we have the civil construction business, machine control, as you would know it, and then the construction software. Within the civil construction business, we don't -- we really don't have TC1 today, but that is absolutely where we're going. It's connecting the machine control offering with the software. We do that informally today, like that's the path we'll for sure be going. So I'd say we're not fundamentally doing it in the civil space today. So there would be no customers that we're hitting there. Within the construction software business that we have, this is for sure where we're taking the business and where we're having success. I have one caveat within that, which is our SketchUp product in our architecture and design business because SketchUp has millions of users from makers to architects. And so it's a different market segment. So I don't think that the millions of users of SketchUp are going to all be relevant for TC1. So if I take it within the subset the construction software, we would have an ambition to have, it's well more than half of our customer base on the Trimble Construction One agreement. We've got many thousands of customers on the frame agreements today. The team does a great job even if somebody is not buying a full bundled opportunity that they're putting them on the frame -- customers on the frame agreement such that they have a path to have access to more of our solutions and to have more of those more easily. So I hope that gives you a little color on how we think about the TC1 opportunity within B&I. What we'll continue to do, I guess I'll have a little bit more Tami, is our sweet spot today is at that contractor level with the TC1 offering, then we look at an architecture and engineering experience for TC1. We look at a civil contractor experience for TCI. So I have a series of expansions through tailoring experiences to the customer segments that we serve and then actually also rolling this out on a global basis. So overall, we're still in the early innings, and that's good news in terms of the continued growth opportunity.

Rob Painter:

Yes. I mean just to give you a little higher level color on that for the moment. So the qualitative before quantitative. On the qualitative side, the gross margin improvement is fundamentally about the mix of the software business. So this isn't a price, I'll say, a price-driven benefit where we also see benefit in the margin as from the cost abating the inflation coming down in the supply chain, purchase price variance is going down or going away. So that means the hardware businesses are returning to increase their gross margins, by and large. You put that on top of selling more software, which comes naturally with a higher gross margin, and you get that 64.2% gross margin, which was a time of record we had from Q1 and is a remarkable change from gross margins of the past at Trimble. So it's more -- much more driven by that than price.

Operator:

Our next question comes from Mr. Rob Mason with Baird. Please go ahead.

Rob Painter:

Hi, Rob. Good morning. If we look at the segments within the market, clearly, infrastructure is the strong point, both, I'd say, North America, but also globally. There's also mega projects happening around the world and those are positives for us. On the, I'll say, the non-res side, if I exclude infrastructure non-res where we see pockets of -- continue to see pockets of strength and if I think here in North America, I think about renewable energy projects, we think about some onshoring of manufacturing, data centers, which correlates to AI, we believe, those are areas where we're seeing strength. And residential specifically, there's a little bit of a mixed tail. There's still a fair amount of new homebuilding happening, I'll stay within the US here for a bit on residential. But -- and so we see sort of up and down trends on that. I mean, it's been net down on residential, for sure. And hopefully, we can get to some stabilization on that. I don't know that I would call it stabilized yet in North America. But the economy looks like we might be able to head for us if we had for that soft landing, then that would be a good thing. Residential has been harder in Europe and then, that one have much more of a challenge than the US, and that's worth calling out. So you put the sum of that all together, and you get the forecast what -- we get the results that we have and the forecast that we put going forward.

David Barnes:

Yeah, Rob, it will -- it's mostly mix driven, both the dynamics from Q1 to Q2 and then Q2 for the rest of the year. We do expect it to step down in Q3 and then up again modestly in Q4 driven by more software mix in the business.

David Barnes:

Sure.

Devin Au:

Great. Thanks for taking my question. I want to ask about your construction software business as well, really strong results there. I think one of our competitors reported yesterday and saw churn maybe up-tick slightly. But I'm just curious, if you've seen any similar dynamics around churn in the quarter, any noticeable up-tick or downtick? And if you can also comment on how retention or NRR has trended from last quarter that would be helpful?

Devin Au:

Got it. No, that's great to hear. And then, a quick follow-up for me, as you mentioned the closing of a large federal government order in geospatial, any details on how large that deal is? I just want to get more color on how much revenue got pulled forward from 3Q into 2Q? Thank you.

Devin Au:

Thank you.

Operator:

Good day and welcome to the Trimble First Quarter 2023 Results Conference. All lines have been placed on mute to prevent any background noise. [Operator Instructions] And finally, I would like to advise all participants, this call is being recorded. Thank you. I’d now like to welcome Rob Painter, Chief Executive Officer to begin the conference. Rob, over to you.

David Barnes:

Thank you, Rob. I'll start on Slide 5. First quarter revenue of 915 million was above our expectations coming into the quarter. I'll remind you that revenues were exceptionally strong early last year as we recovered from our supply chain challenges and worked to bring down backlog. So, our comps this quarter were difficult. Our organic revenue decline in the first quarter is entirely attributable to reductions in dealer inventories. Gross margins were exceptionally strong in the quarter. As Rob mentioned, our 64.2% gross margins are a record in the history of Trimble reflecting both an accelerated mix toward higher margin software offerings and the positive net impact of price realization and lower input costs for our hardware products. Gross margins in the first quarter benefited from a high level of term license renewals in several of our software businesses so we expect some moderation from this high level in the coming quarters. While we continued to spend in the quarter against our strategic initiatives, our strong performance on the gross margin line led to higher EBITDA and operating margins, up 170 basis points and 120 basis points respectively versus prior year. We are pleased with our ability to drive high margins even in a tough environment and as we invest in our business. Cash flow in the quarter improved significantly year-on-year with both cash flow from operations and free cash flow in excess of non-GAAP net income. Our improved cash generation reflects a reduction in cash outflow for hardware component purchases and lower incentive compensation. Note that we did not repurchase any shares in the quarter and will continue the suspension of share repurchases until we have paid down a meaningful portion of the debt raised fund the Transporeon acquisition. Turning now to Slide 6 for some perspective on the underlying drivers of our revenue trends. I'd like to call your attention to a change we have made in the presentation of our revenue breakout on our financial statements. Going forward, our revenue will be broken out in two components. The first category is products, while the second category is subscriptions and services. Product revenue consists of hardware offerings, and our non-recurring perpetual software, while subscription and services revenue is predominantly recurring. In presenting our revenue in this way, we are being responsive to investors who increasingly think of our growth separately in recurring and non-recurring revenues. We think this new presentation is better aligned with our strategy going forward. Product revenue, including hardware and perpetual software was down 15% organically in the first quarter. The decline in product revenue this quarter reflects a tough comparison with the first quarter of 2022, when our supply chain was freeing up and we were working through extraordinarily high backlog. Our dealers reduced their inventories as expected in the first quarter of this year and we estimate that dealer inventory reductions accounted for roughly 40 million or nearly half of our product revenue decline. Subscription and services revenue was up 14% on an organic basis. To put our first quarter revenue performance into a longitudinal perspective, it is instructive to look at the compound growth back to 2019 before the impacts of COVID and supply chain swings. In this view, total revenue compounded at a 5% rate in the first quarter of 2023 versus 2019. From a geographic perspective, revenue was down 9% organically in Europe. Nearly half of the Europe revenue decline can be attributed to our decision to exit our Russia business. In North America and Asia Pacific, our revenues in the quarter were essentially flat, while revenue in the rest of world grew 6% driven by strong demand from agriculture customers in Latin America. Turning now to Slide 7, we ended the first quarter with ARR at 1.65 billion, up 13% organically. Backlog of 1.6 billion was up slightly versus the prior quarter and down from 1.7 billion a year ago. Hardware and perpetual software related backlog was down 200 million year-over-year, driven by our dramatically improved lead times. Recurring related backlog was up over 100 million year-over-year and up 40 million sequentially due to our growing bookings of recurring solutions. On a 12-month rolling basis, our software services and recurring revenue of 2.2 billion represents 62% of our revenue, up 700 basis points from year ago levels. As we near the completion of the Transporeon acquisition, we did so from a strong balance sheet position with net debt at approximately 1.1x EBITDA. Turning now to results by segment on Slide 8, our software portfolio and buildings and infrastructure had a strong quarter with ARR, up organically by approximately 20%. Segment revenue to our civil construction customers, which are predominantly made up of hardware, were down year-on-year in the quarter as expected as our dealers worked down their inventories. Excluding the impact of dealer inventory changes, we estimate that our retail sales of civil construction offerings were up in the quarter at a high-single-digit rate, reflecting a favorable environment for infrastructure investment. In total, buildings and infrastructure saw 5% organic revenue growth with operating margins over 28%. Transportation segment revenues grew year-on-year organically in the quarter, while operating margins exceeded 15%. Importantly ARR grew at a mid-single-digit rate in the quarter for this segment. The turnaround of our transportation business is underway and we are encouraged by the continuous improvement in ARR growth, revenue growth, and operating margins. In the Resources and Utilities segment, revenue was down organically as expected. Like our other hardware centric businesses, R&U revenue trends were impacted significantly by tough comps with prior. In the first quarter of 2022, R&U revenues grew 16% organically as our supply chain freed up and we worked to bring down backlog. On a [full-year basis] [ph], first quarter revenues were up at a compound annual growth rate of just over 6%. Segment margins were extremely strong in the quarter, reflecting lower input cost and the benefit of higher price realization. In the geospatial segment, which is also heavily dependent on hardware, we saw revenue down 16% on an organic basis in the quarter, but modestly better than our forecast. More than half of the year-on-year organic revenue decline for the segment relates to dealer inventory dynamics as dealers reduce their overall inventory levels this year. Geospatial revenues grew organically by over 16% in the first quarter of last year as we brought down backlog. Our geospatial business has felt the slowdown in residential home construction, which has impacted many of our survey customers. I'll now turn to guidance on Slide 9, where we have a number of moving pieces. We are updating our annual guidance to bridge the addition of Transporeon for the remainder of the year. We are also being more prescriptive with our view in the second quarter with the addition of Transporeon. Let's start with the annual outlook pre-Transporeon where we are confirming our baseline guidance view for the business, including our outlook for mid-teens organic ARR growth and full-year organic revenue growth of 2% to 5%. Incorporating Transporeon, we expect the addition of approximately 135 million in revenues over the balance of the year and approximately 175 million of ARR by the end of the year. As such, we now expect full-year revenue to be in the range of 3.835 billion to 3.935 billion. We project that our ARR, including Transporeon will be approximately 2 billion at the end of 2023. We continue to expect the gross margins will expand in the range of 300 basis points for the year versus 2022, coming down sequentially in the second quarter and then progressing up again in the second half of the year. We expect non-GAAP operating margins to be in the range of 23% to 24%. Our guidance now assumes a more favorable tax rate than our last forecast based on a more favorable outlook on our tax rate from the Transporeon acquisition. Our updated outlook for earnings per share is in the range of $2.52 to $2.72, reflecting a mid-single-digit percentage dilution from Transporeon and related interest expense, which is in-line with what we indicated in December. We continue to expect the Transporeon will be roughly neutral to 2024 EPS and accretive thereafter. We affirm our free cash flow projection for the year of approximately 1x non-GAAP net income, reflecting in part our plan to reduce inventory levels. Shortly after the close of the Transporeon acquisition, our pro forma net leverage stood at approximately 3.25x with approximately $3.1 billion in net debt. The debt we raised in connection with our Transporeon acquisition carries an interest rate of approximately 6.3%, in-line with our expectations at the time the deal was announced. Given our current cash flow projections, we expect to end 2023 with leverage under 3x. We said in our announcement of the Transporeon acquisition that we expected to restore leverage to below 2.5x within 18 months to 24 months following the acquisition. Our updated projections suggest that we will be able to de-lever to our 2.5x goal sooner than that original time line. Turning to the second quarter. The midpoint of our guidance reflects a return to organic revenue growth with revenue between $962 million and $992 million and EPS in the range of $0.55 to $0.61. We expect the impact of additional dealer inventory reductions in the second quarter will be about half the rate of the first quarter with stocking levels at or near normal levels by the end of June. We expect that our gross margin percentage will be lower sequentially in the second quarter, due to lower term license revenue and a higher share of hardware. Operating margins will also be down sequentially to approximately 22%, reflecting both lower gross margins and higher operating expense from annual salary increases. Looking at the back half of the year, we expect higher rates of ARR and revenue growth. We expect revenue to increase sequentially from the second quarter through the fourth quarter. We project that the fourth quarter will be our best of the year across the key metrics of financial performance, including total revenue, ARR growth, organic revenue growth, and operating margins. As it relates to our view on segment growth throughout the rest of the year, we expect all four of our segments to post improving, sequential, organic ARR, and revenue growth through the balance of 2023. Buildings and Infrastructure will remain our fastest-growing segment as we expect our recurring software businesses to sustain solid performance while our civil hardware business improves with more normalized dealer inventories. We expect our geospatial segment to return to positive organic growth in the second half of the year, but remain modestly down for the full-year. We expect resources and utilities to return to growth late in the second half of the year, driven by an expected pickup in our aftermarket channels. Over to you, Rob.

Operator:

[Operator Instructions] And your first question comes from the line of Jerry Revich of Goldman Sachs. Your line is open.

Rob Painter:

Hi, Jerry.

David Barnes:

Sure. Jerry, it's David. There no fundamental change in the momentum of the business – recurring business in Buildings and Infrastructure. It happens to be the case that in the first quarter, that's when the term licenses renew. And so, if you're going to have churn, that's when you have it. And that factor will abate and we expect to end the year actually a little north of 20% for Buildings and Infrastructure ARR. So, the momentum is solid.

David Barnes:

Yes, you're right, mid-teens. I'll try not to be too specific, but it's north of 13%. So yes, we project that ARR growth will accelerate for the balance of the year.

David Barnes:

Yes. So first, the 10% refers to will have – we project 10% less revenue than you could have extrapolated from the directional indication we gave in December. It's still growing. It's just growing a little more slowly than we'd expect. From a margin perspective, we indicated that EBITDA margins would be about 30%. I still think that's the long-term trend, but we've lost a little bit of fixed cost leverage. Probably the simplest way to think about that for the year, Jerry, is Transporeon margins will be pretty close to the Trimble average this year and then higher as the business gets back to growth or higher levels of growth.

Operator:

Your next question comes from the line of Rob Wertheimer from Melius Research. Your line is open.

David Barnes:

Yes. There's two big factors that drove gross margin up significantly in the quarter. One is, as you said, the mix shift is very favorable because our hardware business was down and the software business was up, but an equally important factor is that we're way past the hump of our inflationary cycle in our hardware businesses. In fact, year-on-year, our input costs are down. We were heavily dependent on expedited freight in the broker market for parts a year ago, and we've got more price realization. So, we have seen a pretty important improvement in the margins within our hardware portfolio.

David Barnes:

Well, we're investing in our business. The guidance and the script comments reflect. We don't think the gross margins will stay at the high level they were in Q1 for the rest of the year. We'll be modestly below that, partly because the mix comes back to a more normalized mix as our hardware businesses get past the hump of dealer inventory reductions. But look, if you look at our operating expense, even for – with the year's outlook, we will grow OpEx faster than revenue. We normally don't like to do that, but we're investing against our business. Part of it is R&D. Part of it is against the digital transformation, the creation of platforms. So, we are investing against the business even while we get through the noise of the supply chain and the higher gross margins helps us do that.

David Barnes:

Sure. I'd say the pace of inventory, destock is exactly what we thought it would be a quarter ago, and we'll be essentially all the way through it by mid-year. We're on the plan on destocking that we laid out a quarter ago. And yes, I think that answers your question. And that's true for our businesses in aggregate, so including the ag business.

Operator:

Your next question comes from the line of Kristen Owen of Oppenheimer. Your line is open.

David Barnes:

I'll comment on pacing and Rob can add on the data strategy. So, we're about to cross an important milestone where we've put into production, the digital backbone for our North American enterprise software business for the construction industry, so that will go live next week. And what that does, Kristen, is systematically enables the TC1 bundles that we've been selling in a sort of [indiscernible] way to date. And we've had success in the [indiscernible] approach, but we're about to cross an important milestone in what we call digitally-enabled Trimble construction one with bundles that are more accessible and easier for our people to sell and our customers to consume. This is part of the journey we're on. We have additional rollout scheduled for our digital transformation that over the next couple of years will benefit the whole of our business. So, we're going to see some tangible – much more tangible benefits from the investments we've been making on digital transformation.

Kristen Owen:

That's very helpful. And leads me to my follow-up question, which is really one about the competitive environment. I mean you talked about some of the trends that we've seen on the technology side. And certainly, over your tenure, you've seen a lot of shifts in that technology space. But I think the investor sentiment suggests that some of the recent announcements that you all have made and maybe some of those made by your partners, suggest that there's a shift happening in the competitive environment. So, can you just speak to that? Any discussion of disintermediation or how you view your competitive positioning today? That would be helpful. Thank you.

Kristen Owen :

Great. Thank you so much.

Jonathan Ho:

Hi, good morning. With the Transporeon acquisition, can you give us a little bit more color on the impact to the growth rate? And maybe what incrementally changed in the macro to cause that reduction in expectation? It's a little bit of a larger reduction than we would have thought just given the price paid for the company?

Jonathan Ho:

Got it. And just in terms of a quick follow-up. Can you give us a sense of what your dollar-based net retention looks like for your ARR? We're just trying to understand sort of how much of that ARR is coming from new versus existing customers? Thank you.

Jonathan Ho:

Company as a whole?

Rob Painter:

And Jonathan, the thing I'd add to that is the nature of the technology at Trimble is that it's mission-critical. You're using it most of the day. It's not a nice to have on the shelf-type software that you can easily get rid of.

Operator:

Your next question comes from the line of Chad Dillard with Bernstein. Your line is open.

David Barnes:

Hi, Chad.

Rob Painter:

Sure, Chad. Hey, this is Rob. So the 13% was at the company level of organic ARR growth that we see going up through the rest of the year. If we go into Buildings and Infrastructure, specifically, the Buildings and Infrastructure grows, ARR has been growing faster than that company average. And we expect that to grow throughout the year as well in Buildings and Infrastructure. When we go through the business reviews, and one of the things that is, I'd say, great about an ARR business model is, we closed in the quarter at $1.65 billion of ARR. And by the way, that's a conservative view of ARR. We don't take the contracted ARR view at the end of the quarter, which would be higher. But we wake up on the first day of the second quarter, and we've got line of sight to $1.65 billion of revenue going forward for the next year. And you can see that show up in the remaining performance obligations. And so, when we look at the businesses, you can get a bit scientific about it because you can go and do a go get analysis. You understand the revenue you're walking in with whether it's a quarter or a year or multi-year period. You know get delta that you have to close in order to hit the ARR forecast. Against that delta, you look at a pipeline that you have a bookings pipeline and then it's a conversion ratio of that bookings pipeline to what can hit short-term ARR versus will become deferred revenue that's monetized over time. Now, within that, if I take Buildings and Infrastructure, specifically, cross-sell and upsell are significantly driving business for us, the bookings of business that we have. What we're seeing is that we're bringing on new logos as we go to market as One Trimble through this Trimble Construction One offering. We're seeing cross-sell between Viewpoint and Tekla. We're seeing it from our bid-to-win acquisition and the Viewpoint business. We're seeing it from Viewpoint and our MEP business. I'm just really proud of the team who's put in the work to define the business model offerings and to organize the go-to-market efforts and the sales enablement behind that to actually execute on a vision. It's easy to have a division. The work happens behind the scenes to bring it to life. And the team is – continues to deliver proof points that we're on the right track here. We're seeing higher win rates in the deals in the market. We're seeing larger deal sizes when we go to market as One Trimble, we're seeing shorter sales cycles when we do it. So, I like the setup. We expect to continue to see strong growth. Buildings and Infrastructure and the construction software within that, that's the tip of the spear for the transformation at Trimble. We're putting really I'd say the strong, strong majority of our efforts behind making that business successful and using that as a template for the rest of the organization. And I think the last thing I would say is, ultimately, we're taking dollars to the bank, not percentages. These numbers continue to get bigger and bigger. So, posting strong double-digit growth on a larger base, I think is worth noting, David, I think, mentioned in his comments that we could expect to see $2 billion of ARR by the end of the year and Buildings and Infrastructure would presumably be about half of that.

Rob Painter:

Sorry, Chad, do you mean at a company level? Or do you mean at a segment level?

Rob Painter:

Well, from a segment perspective, we – outside of Resources and Utilities actually very little goes through OEMs. It's in the single-digit percentage in the Resource and Utilities. Of course, that's agriculture. And I think we've said about 25%.

Chad Dillard:

Okay. Thank you.

Jason Celino:

Hi gentlemen. Good morning. Your construction software business continues to be one of your better performing segments, a lot of questions today so far. But David, you mentioned seeing a little bit of additional churn in Q1 for some term licenses. It sounds like it's minor, but I don't know if you can clarify this a little bit.

Jason Celino:

Okay. So, it sounds like this might be for some of your older solutions.

Jason Celino:

Okay, perfect. And then on second quarter specifically, I think, any way to clarifying how much Transporeon is contributing? I realized that the full year is 135 million, but anything that we should know about seasonality or how that might ramp through the year? Thanks.

Jason Celino:

Perfect. Thank you.

Operator:

Your next question comes from the line of Tami Zakaria from JPMorgan. Your line is open.

Rob Painter:

Hi, good morning, Tami. It's Rob. Well, we've been working in this space as you know for a long time, both predominantly in the aftermarket, but with one OEM in our transportation business, in the short-term, we don't see a change to the business that we have with our OEM partner. Long-term or actually even mid-to-long term, the exact nature of the upgrades we're making on our technology in the transportation business is to deliver the open platform that customers in the aftermarket have been looking for. Back to an earlier conversation we're having in the Q&A on mix fleets. The same dynamic happens with trucking companies most are operating multiple – yes, multiple truck OEMs within their fleet even different engine types. So, you can have really quite different configurations, different configuration perform better at different parts of the country. What you would need here in Colorado and the mountains is a different machine or I'd say a different truck performed – is optimized better here than it is in a different part of the country. And so, we continue to see customers looking to integrate mixed fleets. When you have that open platform that can come out of the OEMs, when they have that openness, you can put in a Trimble or a Trimble competitor technology and user interface on top of that. So, I think it's an equalizer in the market.

David Barnes:

Yes. Tami, it's David. There is some seasonality in the business. Historically, it's strongest in the fourth quarter. There's a lot of goods that flow closer to the holiday season. But I don't – there's also some underlying growth. So, the way I would suggest you look at it the way we look at it is of the 135 million, we'll have roughly 30% in Q2, a third in Q3 and a little more than a third of Q4.

Operator:

The next question comes from the line of Josh Tilton of Wolfe Research. Your line is open.

David Barnes:

Hey, Josh, David Barnes. I'll start. So the Transporeon business model, as Rob mentioned, is transaction-based, principally not a subscription. So, our software offerings, as Rob discussed earlier, are mission-critical for our customers and are much less susceptible to any short-term trend in the end customers ongoing transaction or ongoing level of business. Our view is that there's some puts and takes, but the aggregate demand we see for our business has not changed over the last 90 days. We do see some signs that in a few of our end markets, actually, the overall macro outlook is improving. I look at Geospatial, for instance, we assess our dealers for their sentiment. We talked to some of their customers in the survey business. They're feeling a little better than they were. Input costs are abating. So, overall, we're very confident with the outlook for the rest of the business that we articulated a quarter ago. Transporeon is impacted by the particular macros of Europe and the end markets they serve.

Josh Tilton:

Super helpful. And then maybe one more for me. I know you guys got a lot of questions on Building and Infrastructure. I'm going to ask one more, although it's maybe a little unusual. A lot of your construction peers believe that it's kind of hard to know exactly which markets are stronger and which are weaker, given their customers' portfolios are very diversified. So, first of all, I guess, we really appreciate the disclosure on the residential infrastructure strength. But I guess my question is like, is there something unique to your business that gives you the visibility into which markets are performing better or worse than maybe your peers don't have?

Josh Tilton:

Much appreciated. Thank you guys so much.

Rob Mason:

Yes, good morning. Thanks for taking the question. Rob, you talked about the work that you'll be doing this year to transition some of your ag channel to more independent dealers. How can we track your progress or what markers should we be watching, I guess, leading up to that transition of the channel? And would you expect that the net effect of that transition this year to be neutral or positive or negative on 2023?

Rob Mason:

That's helpful. That's helpful. Just as a follow-up around Transporeon. Obviously, it's European-centric. How should we think about your ability and maybe pace of the ability to leverage that platform and penetrate other geographies in North America, in particular, I guess? And how would your approach necessarily need to differ if it would to build a network outside of Europe versus what they have done in Europe?

Rob Mason:

That’s helpful. Appreciate the response. Thank you.

Operator:

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trimble Fourth Quarter 2022 Results Conference Call. Today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. [Operator Instructions] At this time, I would like to turn the conference over to Rob Painter, Chief Executive Officer. Please go ahead.

David Barnes:

Thank you, Rob. Starting on Slide 4, I'd like to begin my financial commentary this quarter by discussing organic growth trends across the components of our business. As Rob mentioned earlier, our recurring revenue businesses grew strongly year-on-year in the fourth quarter, with ARR up 16%. The strength of our recurring revenue offerings in a weakening and uncertain macroeconomic environment validates our focus on the continued evolution of our business model. While our recurring revenue streams were strong in the fourth quarter, revenues of hardware and related software were down. Organic hardware revenue was down 13% versus prior year and came in below our expectations. The factors driving the slowdown in our hardware business in the fourth quarter were consistent with what we described in our third quarter call. During the fourth quarter, our dealers continued to reduce their inventory levels, reflecting both our improving supply chain execution and uncertainty in the future economic outlook. The drop in demand was most pronounced in our Geospatial segment, as our surveying end customers ordered less than they did earlier in 2022. Hardware backlog reduced sequentially during the quarter as expected. From a geographic perspective, revenues were up modestly on an organic basis in both North America and the Rest of World, with strong trends in Latin America, but were down in Europe and in Asia Pacific. Year-on-year, Europe trends were meaningfully impacted by the loss of business in Russia and Ukraine and were up 1% organically excluding that impact. With that as a backdrop, I’d like to turn now to our total financial performance for the fourth quarter and full year 2022. Starting on Slide 5, fourth quarter revenues of $857 million were flat on an organic basis, and down 8% when including the impact of foreign currency and acquisitions and divestitures. Gross margin was up 400 basis points, reflecting both the accelerating mix shift toward software and the positive net impact of our price increases and moderating cost inflation. EBITDA margin was up 20 basis points and operating margin was down 20 basis points, as increases in our gross margin largely offset higher spending against our Connect and Scale strategy, especially our digital transformation and higher spending on travel and trade shows. Diluted earnings per share were $0.60. Looking at cash flow, both cash flow from operations and free cash flow were, as expected, down year-on-year, with the single biggest factor being the amortization of R&D for tax purposes. We did not repurchase any shares during the quarter, and do not plan to restart our repurchases until we are well on the way to de-levering following the issuance of debt to fund the Transporeon acquisition. Turning to Slide 6 and results for the full year 2022, we achieved success across a number of critical dimensions. Organic revenue grew by 7%. Gross margin improved by 170 basis points, reflecting the positive impact of our ongoing mix shift. EBITDA margin was 25%, even as we restored spending across a number of areas that had been constrained during the COVID pandemic and as we accelerated investments against our strategy. Cash flow was down year-on-year principally as a result of an increase in our inventories and a change in U.S tax legislation, both of which we expect to normalize over time. As we move to complete the Transporeon acquisition, we take this on with a strong balance sheet. Working capital remains negative. Our year-end net debt to EBITDA ratio stood at 1.4x and the ratings agencies maintained our bond ratings and stable outlooks following the announcement of the transaction. Turning now to our quarterly and annual results by segment on Page 7. Speaking to the fourth quarter, Buildings and Infrastructure achieved organic ARR growth of over 20% and recurring bookings growth in the high teens. Sales of civil construction hardware were down year-on-year by just over 10%, leading to organic revenue growth for the segment of 2%. Dealers continued to reduce their inventory levels, and end market demand moderated. Segment margins at 25% were down year-on-year, impacted by lower civil construction revenue, our Dimensions user conference, subscription transition and Connect and Scale investments. Revenues in the hardware centric Geospatial segment were down 12% year-on-year on an organic basis, driven principally by declining dealer inventory levels and softer end market demand across the surveying sector. Segment revenues were also pressured by lower shipments to U.S Federal customers, which vary meaningfully from quarter-to-quarter and can be difficult to predict. Segment margins remained over 25% despite these headwinds. Revenues in our Resources and Utilities segment were up 6% organically driven by growth from Cityworks and positioning services sold to agriculture customers. Our agriculture revenue was impacted by the loss of business in Russia and Ukraine, with an estimated year-on-year impact of minus 5% to the segment in the fourth quarter. Segment margins improved in the quarter sequentially and versus prior year, coming in just under 36%. Our fourth quarter results in the Transportation segment reflect improvement across a number of dimensions. Organic revenue grew 5%, driven by higher year-on-year sales of Enterprise and Maps software solutions. ARR for the segment grew at a mid-single digit rate in the quarter. Revenue trends in our mobility offerings improved sequentially from prior quarters, driven in part by higher sales to our largest OEM customer. Operating margins of 14.5% were the highest since 2019, and reflect strong performance by our team in managing costs. Let’s turn next to our guidance for 2023 on Slide 8. The projections I will share with you today exclude the impact of our pending acquisition of Transporeon. Starting with ARR, we expect organic ARR growth at a mid-teens level in 2023. Our strong outlook for ARR growth is grounded in the solid bookings momentum we achieved in 2022, the potential for accelerated cross-sell as our digital transformation rolls out to a growing portion of our business, and the essential role that our software plays in our customers’ operations. Our outlook for revenue, excluding future acquisitions and divestitures, is $3.7 million to $3.8 billion, reflecting an expectation of organic growth in the range of 2% to 5%. As a reminder, divestitures of businesses in 2022 will impact total reported revenue growth trends, with the biggest impact in the first half of the year. Our cautious outlook for 2023 organic revenue growth is rooted in an expectation of continued dealer inventory reductions over the next several quarters, and softer end market demand in an environment of limited GDP growth. We expect revenue from hardware and related software will be down in the low single digits organically for the year, offset by strong recurring revenue growth. From a margin perspective, we expect that gross margins will improve by over 200 basis points as our business mix continues to shift in the direction of higher margin software. We expect a modest increase in operating margins, as we invest against our strategy in an environment where organic revenue growth is harder to come by. I'll note here that our leadership teams have been working hard over the last several months to adapt our spending plans to the current economic climate. Allocating capital against our strategic priorities is always a major focus for us, and the need for sharp focus is never higher than in a time of weak economic growth. We are confident that we can continue to progress our strategy within the constraints of our operating plan. Income from equity investments is expected to be relatively flat with 2022, and net interest expense is forecast at approximately $70 million. Netting this out, we project to achieve earnings per share in the range of $2.66 to $2.86. We expect that cash flow will grow significantly in 2023 driven in part by reductions in inventory levels. We expect free cash flow for the year of approximately 1x non-GAAP net income. Our cash flow forecast for this year now assumes that amortization of R&D costs under Section 174 of the U.S tax code will not be repealed within a time frame that will allow us to recover the accelerated tax payments that we made in 2022. While we believe that there is bipartisan support for this change, we are less confident than we were a quarter ago that this legislation will pass soon enough to help us this year. By way of reminder, this issue impacts the timing of tax payments and has an immaterial impact on our tax rate. If Section 174 is repealed within the next several months, our free cash flow would benefit by approximately $150M. Note that our cash flow guidance excludes the impact of transactional costs related to the pending Transporeon acquisition. While we are not offering quarterly guidance, a few factors are likely to impact the sequential evolution of our financial results as the year progresses. We expect organic revenue to be down in the first quarter and flat in the first half of the year, reflecting the strong growth in hardware and related offerings that we saw in the first half of 2022. We expect organic revenue to be up in the mid- to high-single digits in the second half of the year. Influenced by these revenue growth patterns, we expect operating and EBITDA margins to be relatively flat in the first half of the year, and up in the second half. While we expect mid-teens organic ARR growth for the year, growth in the first half is likely to be slightly lower driven by planned churn from a small number of customers. We expect ARR growth to improve sequentially through the year. From a segment perspective, we expect organic revenue growth for the year in the Building and Infrastructure, Resources and Utilities, and Transportation segments, with the strongest growth in Buildings and Infrastructure. Revenues in the Geospatial segment are expected to decline for the year, with the highest levels of organic decline in the first quarter as we lap strong numbers from the first quarter of 2022. Geospatial trends through 2023 will continue to be impacted by reductions in dealer inventory levels and ongoing softness in demand in a number of the segment’s end markets. We expect margins to be stable in Buildings and Infrastructure and Resources and Utilities. We project growth in Transportation margins, while Geospatial margins will be down modestly for the year. Back to you Rob.

Operator:

Thank you. [Operator Instructions] We will go first to Jonathan Ho at William Blair.

Rob Painter:

Hey, good morning, Jonathan. It's Rob. So let me give you -- break it down in three respects, context, strategy and next steps. For context, let's talk about Connect and Scale, and our strategy means to connect users data and workflow and the users are at the center of our universe. And in that we believe we need to be closer to the customers that user, that farmer. So when we talk to the customers, and we work with, by the way over 100 OEMs today, and obviously, the farmers themselves, what they're asking us to do is to help them manage a mixed fleet. And I personally visited farmers in the last 6 months in Mexico, Chile, Brazil, Japan, Australia, Germany, and here in the U.S. So the strategy is we -- go-to-market strategy is we sell-through multiple avenues today to reach our customers we sell. We have a direct sales, particularly the enterprise farms, we sell-through OEMs, we work with over 100 OEMs and then we sell-through a channel, and the channel breaks down into a Trimble channel that we already have today to reach the aftermarket as well as selling through CNH dealers in the aftermarket. So what we're moving from is where we sell to CNH today, so call it CNH --from Trimble to CNH corporate to reach the CNH dealer. That's the from the to -- the to be state we'll be going from Trimble straight to independent dealers. And those independent dealers will be capable of selling the full line of Trimble CAT, which is more than guidance, because we also do variable rate, we do selective spraying, we do water management, and we do software. So as we look forward to this, as we work through the transition, we need to sign up the dealers to be independent dealers directly with Trimble. And we think it can expand the available set of products and capabilities they have to take to market, we think that will help us be incrementally closer to the end users of the technology and in a context of customer success, which is part of our strategy. And we think we can help customers and those users become more successful with the technology because when we're out there in the field, talking to them, they are asking for help to integrate and manage a mixed fleet of technology as well as mixed fleet of equipment.

Rob Painter:

Sure. So we've been investing in this strategy incrementally, really for the last couple of years. And demonstrable evidence of where we see the attractiveness of it and I'd say momentum for it is in the growth of the ARR. So the work we're doing up front really is touching more of our software businesses first, and particularly the recurring revenue businesses that we have. So a post of 16% organic growth on ARR, the 1.6 billion. This is supporting growth, continued growth and as and I think from a shareholder value perspective, this would be the most valuable revenue stream that we have at the company. The investments, they pick up systems, they pick up people, they pick up process, so from a systems perspective and customer facing, I think internal facing from a connect -- The scale part of Connect and Scale, enabling us to efficiently and effectively grow. Look at people and the work that we're doing, we look at customer success. Customer Success is about net retention. That's the metric you look at for customer success. And the economics of net retention are very, very powerful. So I'm of a mind, we're of a mind that we continue down this path. And if anything, we continue down this path with more, more conviction. And behind all of this there's a strong balance sheet 24.3% EBITDA in the quarter. So we believe this is emphatically the right thing to do at this moment.

Rob Painter:

Thanks, Jonathan.

Rob Wertheimer:

Hey, good morning, everybody. It seems like there's a lot of structural progress next quarter on margins on ARR, which is, I guess, continuing and the surprise, I guess, for us was just a bigger destock in the hardware than we would have thought. And so, I had a couple of questions around that. One is, were you able to see those elevated levels of inventory, previously dealers and for the normal after what you look in your outlook, or are they low? I mean, there's any characterization that I guess there's been a debate in construction in North America anyway, as to whether large projects will fill in, smaller projects go away. And that seems to be the case. But maybe your mix of your customers is more fragmented than the big ones. I'm just trying to look for context around why that decline happened and is continuing and how big it is.

Rob Wertheimer:

And any guess on if those two quarters happen, or would dealers be lower than normal at that point, and they maybe don't have perfect visibility into the channel, I understand.

Rob Wertheimer:

That's perfect. Thank you.

Chad Dillard:

Hi, good morning, guys.

Rob Painter:

Hey, Chad, so this is Rob. I'll start with the quantitative framework. We had a chart on the second slide that showed over the last 3 years. The CAGR of the hardware businesses has been 12%. Those three businesses are surveys, civil construction, And Ag. Ag has been above that 12%. growth over the last 3 years. And Ag grew this year. And it grew even more if you exclude Russia and Ukraine, which was we were selling quite a bit of kit and to Russia. And so we'll start to lap that later this year, mid this year. So to call that context, in terms of the growth that we've had. And I'll give you some more context when we look at -- we look at units, we look at pricing, we look at share of wallet, we look at market share, and we think we're holding our own on a global basis and probably growing, growing in, Europe holding around and North America growing in Brazil. So we now turn to the to the CNH part of your question. For this only for that we're talking about the aftermarket business that we have with CNH. As we -- and that business that we sell-through CNH into the aftermarket today is primarily guidance. So an opportunity we have as we move to independent dealers. And remember we have independent dealers today, they're Trimble, four line Trimble dealers today in agriculture. As we move the business that goes through CNH, that gives us an opportunity to expand the product portfolio to a set of independent dealers. Those independent dealers could very well be dealers we already work with today, that just will happen in a direct route with a direct relationship with us at Trimble or it may be a fully New Dealer, we have a 12-month transition with CNH on this part of the arrangement. And it's a very positive conversation. I want to say that we've been having with the CNH with the CNH team. So optimistic here, it's the right thing to do with what our customers are asking for. And it's time to get to work to set it up. That's helpful. And then just my second question. So can you give an update on the digital transformation? What percentage are you done -- [indiscernible] '23. Can you talk about some of the focus areas for this coming year, and if you can quantify just like the incremental cost to execute expecting for '23.

Chad Dillard:

That’s helpful. Thank you.

Kristen Owen:

Great. Thank you for the question. So I wanted to ask about the e-Builder, Viewpoint SketchUp contingency. This business is obviously doing quite well and a pretty stark contrast to some of the more conservative macro views that you've expressed. And even just on an ARR growth basis, really strong compared to some of the peers in the software space. We've talked about the macro, but I'm just wondering from a portfolio basis, if you can speak to the playbook with these businesses what's working in this environment? And just how do you intend to port those lessons learned over once the Transporeon acquisition closes?

Kristen Owen:

Thanks for that, Rob. And [indiscernible] some of those lessons with Transporeon, how you see maybe some of that value proposition or combining the offerings, how you see that bleeding into the transportation business once that acquisition has closed.

Kristen Owen:

That’s super helpful. I will leave it there. Thank you.

Operator:

[Operator Instructions] We will move to our next question from Tami Zakaria at JPMorgan.

David Barnes:

Tami, it's David. The way to think about that is essentially all of the gross margin improvement is the evolving mix of our business. We are continuing to take price mostly in hardware, but at a lower rate so that's not real the margin driver. What's driving our margins up is we're becoming more and more of a software business and those have higher gross margins.

Rob Painter:

It's -- there's a number of puts and takes in our hardware gross margin. We've already seen a benefit. So in the third and fourth quarter of '22, we got to the point where for our hardware businesses, our price realization more than offset our cost improvements. So that's sort of baked into the run rate now. We are continuing to take pricing at a moderate level in our hardware businesses. So that ought to help our margins just a little bit on the hardware side, but by far bigger story is the mix shift.

Rob Painter:

Yes. So let me frame it up this way. If we look at our dealer destocking, I would say it had a negative approximately 400 basis point impact on our organic revenue trends. So we reported flat. We would have been roughly up 4% without the dealer destocking. So if you look specifically at hardware, our hardware revenues organically were down 13. So I think you can infer, Tami, that there was some market softness, particularly in Geospatial surveying market in Q4, which partly we think is temporal. We had a lot of new products last year and as in many businesses, when you have new products, you get a spike in orders, and we had a clean supply chain to deliver those through. So we've got a bit of a pullback for that reason. Fundamentally, I would say the secular end market sales to retail trends feel up -- maybe not up as much as they were earlier in 2022, but the general direction is up. There's some soft areas, including anything tied directly to residential construction that is clearly contracted. But on the balance with what's happening in infrastructure, we think the secular direction of demand is up. But with the dealer destocking and the customer ordering patterns earlier in '22, we're seeing a pullback for those reasons.

Operator:

We will go next to Jason Celino at KeyBanc Capital Markets.

David Barnes:

Yes, hey Jason, its David Jason, it's David. We do expect churn from a handful of customers, principally in our Transportation segment. These are customers that made a decision to come off our platforms many quarters ago, and they're just now implementing them. So I see that as noise, not signal our customer satisfaction and retention in transportation is on a secular positive trend. We just expect to see a number of these probably in the first quarter pull off. So that will reduce our ARR growth rate a little bit lower in Q1 from what we expect to see for the full year.

Rob Painter:

The short answer is no, not seeing an impact on the software Portfolio.

David Barnes:

Welcome.

Jerry Revich:

Yes, good morning, everyone. Rob, I'm wondering if you could just talk about the progress on Trimble construction. One, what proportion of new orders does it account for now? And when we last caught up, you were seeing tripled-AASP versus base orders before. I'm wondering if that trend has continued?

Operator:

We will go next to Rob Mason at Baird.

David Barnes:

Yes. Hey, Rob. It's David Barnes. I'll try both. On the Connect and Scale discrete investments spending on that '22versus '21 was about 100 basis points around $40 million. Embedded in our guidance for 2023 is a deceleration in the rate of growth. So we'll spend somewhere in the order of another $20 million or a little more than that, $1million incremental, $23 million above $22 million. We still have more to do and we are -- we believe this is a high priority investment. With regard to the model options, I would say the menu that we presented at the Investor Day is still out there. This topic is tied with digital transformation, our ability to sell hardware and software bundles together in recurring basis is heavily dependent on the rollout of our digital transformation. We're doing it in a somewhat [indiscernible] way now, but the bulk of that opportunity is ahead of us and all the options that we showed at the investors still options we're considering.

Rob Mason:

Well, maybe as a follow-on to that, Rob. Transporeon following that completion of that, you will be in somewhat of a deleverage mode, but how much flexibility are you giving yourself or to be able to do a transaction like, I guess, a rivet or something along those lines, I guess, on the capital allocation side to supplement Connect and Scale?

Rob Mason:

Sure. Okay. Thank you.

Unidentified Analyst:

Hi. This is [indiscernible] on for Gal. Thanks for taking my question. Just wanted to follow-up on a prior question regarding digital transformation. How is the progress for revenue being transacted through the connected digital platform tracking versus your expectations? And where did that shake out as a portion of revenue for FY '22. At the Investor Day, I believe 2% of revenue had or had been expected to be the target as communicated so as that met or exceeded and do the projections show that your investor base still stands for the portion of revenues expected to transact through the digital platform in the future? And then just 1 brief follow-up. Thanks.

Unidentified Analyst:

Got it. That's helpful. Thank you. And then just one follow-up. Has anything changed from the time Transporeon was announced that would maybe alter the expectations for revenue and EBITDA initially communicated at the announcement of the acquisition or everything all good there so.

Rob Painter:

Thank you guys.

Michael Leyba:

Thank you, everyone, for joining us on the call. We look forward to talking to you next quarter.

Operator:

Good morning. My name is Chris and I will your conference operator today. At this time, I would like to welcome everyone to the Trimble Third Quarter 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] Thank you. Rob Painter, Chief Executive Officer, you may begin.

David Barnes:

Thank you, Rob. Let's start on Slide 5 with a review of third quarter results. Third quarter revenue of $885 million was up 6% organically. Changes in foreign exchange rates reduced revenue by 4%, while divestitures net of acquisitions also reduced revenue by 4%. Pricing drove slightly over half of our year-on-year organic revenue growth. Software and recurring revenue continued to grow at a strong rate as reflected by the sequential acceleration of our organic ARR growth. Ongoing transitions of software models from perpetual to recurring, principally in our Transportation and Buildings and Infrastructure segments, contributed to our ARR momentum, but reduced revenue growth in the quarter by approximately 100 basis points. Hardware revenues grew modestly on an organic basis, enabled by reduced lead times and improving throughput from our supply chain. Supply chain constraints continue to be dynamic in nature, but our team made good progress in the quarter working around these constraints and executed well in a challenging and unpredictable environment. Bookings for hardware products from our dealers declined sequentially from prior quarters and came in below our expectations, reflecting a softening demand environment in some of our end markets and lower dealer inventories. Gross margin in the third quarter was a record 60.9%, up 220 basis points year-over-year, driven by an increasingly favorable business mix and the improving net impact of pricing and slowing input cost inflation. Adjusted EBITDA and operating margins were essentially flat year-over-year, and well above pre-COVID levels. Strong gross margins and lower accruals against our annual incentive plans fully offset the year-on-year impact of spending against our strategic initiatives. Net income dollars decreased by 3% and earnings per share were flat year-over-year at $0.66 per share. Our trailing 12-month cash flow from operations was $440 million, and free cash flow was $389 million, both of which are down versus prior year. As we outlined in our last earnings call, inventory dynamics and a change in the U.S. tax law are adversely impacting our cash flows in 2022. Our inventories are well above the levels we held before the supply chain shortages emerged in 2021, as we have been buying to support improved hardware lead times. And a provision in the U.S. tax law has resulted in the amortization of R&D costs for tax purposes beginning in 2022, which has meaningfully impacted the timing of tax payments. We expect both of these unusual factors will reverse in 2023, which will yield significant increases in cash flow and a more normalized relationship between earnings and cash flow going forward. Note that the underlying working capital dynamics of our business remain strong, with essentially zero net working capital even at our temporarily higher levels of inventory. Notwithstanding a reduction in backlog from improved hardware lead times, we enter the fourth quarter with $1.5 billion in backlog, $1.3 billion of which supports future software, services and recurring revenue. We ended the quarter with leverage measured as net debt-to-EBITDA of 1.4 times, giving us a resilient capital structure and the flexibility to invest where we see opportunity. This quarter we funded our acquisition of Bid2Win and completed $90 million in share repurchases. Turning now to Slide 6, I'll review in more detail our third quarter revenue trends. On this and the next few pages I will focus on organic growth rates, excluding the impact of acquisitions, divestitures, and currency fluctuations. ARR was up 16%, with strong bookings in construction and healthy net retention across our portfolio. Our non-recurring revenue streams grew modestly, with hardware up 3% year-over-year. As Rob mentioned earlier, our non-recurring revenues were below our expectations, driven by weaker end market demand in some markets, especially in Europe, and growing caution among our dealers on how much inventory they want to hold. From a geographic perspective, North American revenues were up 10%. In Europe, where the macro-economic outlook contracted the most, revenues were down 3%. Asia-Pacific was up 4%, and the rest of world was up 21%. Next on Slide 7, we highlight some of the key metrics that we follow. ARR in Buildings and Infrastructure, Geospatial, and Resources and Utilities all grew at a mid-teens or above rate, while Transportation ARR growth was high-single digits and improved sequentially. Let’s turn now to Slide 8 for additional detail on each of our reporting segments. Buildings and Infrastructure revenue was up 12%. Revenue growth was strong across our software businesses in this segment, while our Civil Construction hardware revenue benefited from improved supply chain throughput. Segment ARR was up in the [20’s] [ph] in the quarter. Geospatial segment revenue was up 1% over a very strong performance in the third quarter of 2021. Resources and Utilities revenue was up 9%, driven by improved throughput from our supply chain, strong demand from OEM customers, and continued growth in our positioning services. Financial results in Transportation showed progression in a number of areas. ARR growth and margins both improved for the fourth quarter in a row. We continue to progress in the conversion of our Transportation Enterprise software business to recurring revenue models. Turning now to Slide 9, I’d like to provide our updated financial outlook for 2022. I’ll start with ARR. Driven by our momentum in bookings and sustained high levels of net retention, our outlook for ARR growth is unchanged from what we shared with you last quarter. We continue to expect organic ARR growth of approximately 16%. Turning to revenue, we now project organic revenue growth of 6% to 8% for the full-year, which is 300 basis points below the outlook we shared with you in August. For the full-year we expect that changes in foreign exchange rates will reduce year-on-year revenue growth by 3%, while divestitures net of acquisitions will also reduce revenue by 3%. We expect operating margins for the full-year of approximately 23%, which is consistent with the range we shared with you in August. Our outlook for gross margins has improved, driven both by an improving business mix and a more positive outlook for pricing and costs. We project that our improving gross margins and strong operating cost control will offset the adverse impact of lower leverage on our fixed costs. Our forecast for income from equity investments is approximately $28 million and net interest costs are estimated to be approximately $66 million. Our tax rate guidance is a range of 18% to 18.5%. Taken in aggregate, we now expect full-year 2022 non-GAAP earnings per share to be between $2.61 and $2.67 per share. From a cash flow perspective, we now expect the ratio of free cash flow to non-GAAP net income to be 0.5x to 0.6x for the year, with the primary impacts continuing to be Section 174 tax payments and inventory dynamics. We continue to expect to deliver 2023 free cash flow well above non-GAAP net income as these factors reverse. From a segment perspective, in the fourth quarter we expect organic growth rates to moderate in the Buildings and Infrastructure, Geospatial, and Resources and Utilities segments driven entirely by lower year-on-year revenues from hardware. In the Transportation segment, we expect the growth rate to improve sequentially. ARR growth should remain relatively consistent with recent trends in each of our segments. We expect to issue 2023 guidance in February, but at this point we anticipate a 2023 outlook for double-digit ARR growth and strong cash flow generation. Rob, I’ll turn it back over to you.

Operator:

Thank you. [Operator Instructions] Our first question is from Jerry Revich with Goldman Sachs. Your line is open.

Rob Painter:

Good morning, Jerry.

Rob Painter:

Thanks, Jerry. So, ARR, for the total company organic was 16% in the quarter and Buildings and Infrastructure was 21% and it was actually also above 20% in the Geospatial reporting segment. So, it's a strong performance overall. ARR arguably is a lagging indicator, the leading indicator is bookings. So, with respect to your question of looking into Q4 and into 2023, when we look at the ACV bookings, contract value bookings that we had in Q3, those grew faster organically in the ARR in the quarter and that's a really solid leading indicator for continued ARR growth to come.

David Barnes:

Yes, Jerry, I understand your question. There's no real negative margin impact to the outlook we have. In fact, the embedded in our guidance as you do the math, you'll see we expect to have very high gross margins in Q4 even higher than Q3 and that's a function of a business mix, which will be more software centric and we'll have more of the net benefit of the prices we've taken and moderating cost inflation. So, Q4 will be really good from a gross margin perspective.

David Barnes:

This is a little bit of, I'll call it [noise] [ph] between Q3 and Q4 with the reduction in our outlook or forecast for the year, we brought down our accrual against our incentive comp. So, just the incentive comp helped Q3 margins by a little under 200 basis points and that gets normalized in Q4. So, that's really the driver of the expectation of lower margins in Q4 than Q3, but the underlying gross margins will be better and the OpEx as a percent of revenue will look higher, but that's the impact of the accounting for the bonus plans.

Rob Wertheimer:

Hi. Thanks and good morning everybody. Rob, I wonder if you could just drill down a little bit more on where you're seeing it going from great to good and the hardware weakness. I mean, I guess it wouldn't be surprising to see Europe or [European ag] [ph], but I don't know what sounds like maybe you're seeing more than just that. So, that's just a starting point. I think the quarter has generally been pretty okay across industrials and it seems like you're seeing a few more spots of weakness?

Rob Wertheimer:

Yes. Rob, that's helpful. Is the dealer conservatism geographically in product equal or is it concentrated or heavily concentrated in a couple of products or regions?

Rob Wertheimer:

Okay. Thank you. I'll get back in line.

Kristen Owen:

Great. Thank you for taking the question. Good morning. Transportation margin, you called that out as having been one of the highest since 2019. Clearly, there's some seasonality that we would expect to see in 3Q, but I'm wondering if you can talk about some of the successes that you're seeing in that business, where we are in terms of net new business and how we should think about the exit rate for that segment just given some of the changes you've made over the last two years? Thank you.

Kristen Owen:

That's helpful and encouraging to hear. The follow-up question that I have is just around capital allocation location. You're now at nearly 400 million shares repurchased for the year, just remind us how you think about repurchases relative to intrinsic value expectations? Thank you.

Kristen Owen:

That's very helpful. Thank you.

Tami Zakaria:

Hi, good morning. Thank you so much for taking my questions. So, my first question is, this may be a little early to ask this, but how are you thinking about gross margin next year as cost inflation is retreating? Can you remind us how much of margin headwind you saw, let's say, in the past couple of years from cost inflation alone? And can you – do you expect to recapture most of it maybe over the next 12 to 18 months?

Tami Zakaria:

It does. It was very helpful. Thank you. And then a second quick one. Europe, I think organic growth was negative in the quarter. You call that civil construction and Ag demand, I think, you call that as moderating. Did you see order trends sequentially get worse quarter to date versus 3Q? I guess what I'm trying to understand is, when do you think Europe can – how long do you think Europe will stay in the negative territory before it, sort of inflects and bounces back?

Tami Zakaria:

Got it. That's super helpful color. Thank you.

Operator:

The next question is from Erik Lapinski with Morgan Stanley. Your line is open.

David Barnes :

Yes. Hey, Erik, it's David. Margins were particularly good in geospatial and that's mostly a mix issue within the offerings and we think that's a little bit better than we're going to have in Q4. So, it's just a mix of the products that we sell and what we shipped in Q3 was particularly high margin.

David Barnes:

Sure. Well, in the – of the four segments, the geospatial does start with the lowest base. So, in terms of percentage increase to be intellectually honest, it's coming off that lower base. And the team deserves credit for the pivoting of the business model. So, when you buy our instruments and sensors like the hardware centric part of geospatial, so think the surveyors and the [Mappers] [ph] out there in the world, they're buying workflow, actually, they're not just buying an instrument and that workflow includes software. So, we have Trimble business and Trimble access. So, these field to finish workflows that the field needs or if you're doing scanning data or mobile mapping, data collection, you need to be able to process that data. So, the software that we have in that business is being converted more into ratable models, which we think is expands the size of the addressable market, turns the CapEx and the OpEx is helping us as a catalyst to move more of the work into to the cloud. So, in that sense, Erik, yes, I think it's a very good example of connect and scale at play.

Operator:

The next question is from Jason Celino with KeyBanc Capital Markets. Your line is open.

David Barnes:

Yes. Hey, Jason. I'll point out that really important when you look at hardware to get the organic math in your mind. And that's both FX and we divested businesses, which were heavily hardware centric. So, actually if you look at the organic numbers, hardware revenues were up 3% year-on-year in Q3. And that does reflect that we were – our product supply improves a lot and we were able to draw down the backlog and meet the dealer needs where we've had extraordinarily long lead times. So, that having said, embedded within our guidance is that hardware organic revenues are likely to be down in the fourth quarter and it's driven by all the dynamics Rob mentioned.

Rob Painter:

Good morning, Jason. I think there's some growth in that. Our crossed up bookings and part of the business within B&I that's selling Trimble Construction One, we saw over 20% of our ACV bookings coming from cross-sell. And as we've talked about at Investor Day, we're still very early in the work with TC1, I’m expanding that offering into different geographies and broadening the scope and the automation of the offering. So, I think that there's only tailwinds behind the business model aspect of that. And then if I flip it around, let's say, for the rest of the business. The software side at B&I does have incrementally more American centricity to it, which is the healthiest of the four geographies that we report. So that, I think would also help that as well.

Rob Painter:

Thanks, Jason.

Gal Munda:

Hey, good morning and thank you for taking my questions. The first one, maybe Rob, if you think, you mentioned in Europe the infrastructure is actually looking quite good, but if I want to try to think about the infrastructure opportunity, right now in the way you've seen potentially, especially in the U.S., have you seen any of the tailwind from IIJA’s starting to come in or do you think that's something that could actually start being material to the business as we move into the 2020?

Gal Munda:

That makes sense. Thank you. And then if I think about the pricing that you've mentioned as being, kind of one of the drivers and especially on the gross margin side, but if I take a step back and just think about the pricing in general, can you talk a little bit more about what you found on the pricing maybe when you look at hardware versus software split? Have you done any significant price increases in the software side or are you planning to do anything there as we ramp the next year? Thank you.

Gal Munda:

That's really helpful. Thank you, David.

Jonathan Ho:

Hi, good morning. I was just wondering if you could maybe give us a little bit more color on your ARR growth and whether that's coming from net expansion versus new customers, as well as whether there's been any, sort of change in that dynamic?

Jonathan Ho:

That's helpful. And then you mentioned a number of management and leadership transitions at the beginning. Can you talk a little bit more about the dynamics there and maybe what you were, sort of looking for as you were, I guess, making some changes at the second tier management level? Thank you.

Jonathan Ho:

Thank you so much.

Operator:

The next question is from Chad Dillard with Bernstein. Your line is open.

Rob Painter:

Hi, Chad.

David Barnes:

Hey Chad, it's David. As you do through the math, go through the math and look at our guidance, you'll see that we expect meaningful improvement in gross margins from Q3 to Q4 and that's driven by a mix, our hardware revenues even organically will be down in the fourth quarter for all the reasons that Rob mentioned. So, the software to hardware mix is going to improve and we have the benefit within hardware, particularly of a favorable mix between pricing and cost. So that gets you to gross margins. OpEx as a percent of revenue will be higher because we had – we have the bonus impact that I described to an earlier question where we had, call it, no bonus expense in Q3. That's the way the approval works. We also have some step-up in OpEx Q3 to Q4 sequentially. It’s the way holiday's work in Europe and we have a big user conference coming up. So, those dynamics will drive our OpEx as a percent of revenue, higher in Q3 and Q4 with lower revenue unit that all out we expect operating margins to be lower in Q4 versus Q3.

David Barnes:

Yes. We are – I'll say the guidance, the framework we provided earlier in the year and last quarter still holds we're investing against our digital transformation and a handful of other strategic initiatives at a rate that's about 100 basis points of margin. So, that's what it was in Q3. And that's what it will be in Q4. We're looking harder at OpEx everywhere, but as Rob said, what we're not doing is changing our fundamental priorities and progressing against the digital transformation is absolutely at the top of our strategic list. So, that you can call that pressure is there and we're managing to hold our model within the context of sustaining that investment going forward.

Operator:

The next question is from Rob Mason with Baird. Your line is open.

David Barnes:

Yes. So, I'll start with the numbers. You're about right. Our hardware backlog went from about 240 million at the end of last quarter to 180 million so down 60 million, which is a good thing that reflects the fact that our supply chain is improving. Pre-COVID, pre-supply chain, that number was closer to a hundred. So, we will move in that direction, although I'm not sure we’ll ever get back to where it was because supply chains are likely to be different for everybody going forward. As far as dealer dynamics, it's a very dynamic situation. It varies dealer-to-dealer market-to-market. I'd say overall most dealers are about where they have been and probably about where they want to be. As Rob mentioned, the dealers are looking at their markets and are seeing some uncertainty and so their sort of set point for inventory is going down and that's somewhat accelerated by the fact that our supply chain has now gotten so good, not universally, but for most of our products, we have order lead times measured in days, not months. And so, the need to hold a bunch of inventory for the dealer is less than it was. So, it's a mix. There are some dealers that are looking at uncertainty in their markets and will be inclined, particularly with our good supply chain to bring inventories down and some are in very good shape.

Rob Painter:

Well, hey, Rob, this is the other Rob. In the Ag business overall, actually the majority of our business, I want to frame is outside of North America today. So, strong double-digit growth in Brazil, really in South America, continued growth in Asia Pacific. Overall organically, the business was up in the high-single-digits for agriculture. So, I think North America is holding its own as the punch line on that, but I want to put North America in the context of the bigger picture.

Operator:

We have no further questions. At this time, I'll turn it over to Michael Leyba for any closing remarks.

Operator:

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Good day, and welcome to the Trimble Incorporated Financial Results Conference Call. Please note, today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to your host, Rob Painter, Chief Executive Officer. Mr. Painter, you may begin your conference.

Operator:

[Operator Instructions] Your first question comes from the line of Jason Celino with KeyBanc.

Rob Painter:

The majority of the growth, I would say, at the moment is coming from the existing customer base. And that's actually pretty logical from our perspective when we've done the work within our own portfolio. We think there's enormous opportunity to cross-sell and upsell within the customer base. So one of the things that the team has done an excellent job of moving existing customers to Trimble Construction One contract offerings such that they've got an on-ramp to consuming more of the technology. At a net new logo perspective, the team is winning net new logos as well. So -- that is -- I think it's showing some early signs of success. But the bulk and the majority is from existing customers at the moment.

Rob Painter:

Yes, exactly, Jason. So right now, we're working in the -- actually the contractor persona within construction and actually really even within building construction, most specifically, then we'll look towards architects and designers. As a persona, we have a bundled offering with TC1, a suite targeted to them than a suite targeted to owners. Trimble Construction One will also apply to our Civil business, where we can connect what we're doing in the field with office on a singular contract. And then in parallel, but at some level, we'll play out a little bit more serially, as with our transportation business and the agriculture business. So it's absolutely consistent mindset we have across the business as we pursue this platform strategy.

Rob Wertheimer:

Rob, I had kind of a higher-level question. I mean, there's a lot happening in infrastructure construction may actually get going. There's a bunch of kind of mega projects out there that were in the past. And I wonder if you could just kind of assess the strategic landscape for you and your competitors, whether the collection of offerings that you have and are now protecting scaling, is evolving as fast as your competition? Do you anticipate this to be the next 2 or 3 or 4 years that are highly dynamic on acquisitions to get a range portfolio where they want, or is that not necessarily a moment that needs to see people change radically. Just really if you could just assess how you're evolving versus your competitors in the construction landscape.

Rob Wertheimer:

And since you touched on inflation, are you seeing any impact on project pacing or delays or cancellations from that inflation, or is it just something people are evaluating? I guess I'll stop there, Rob.

Operator:

Your next question comes from the line of Chad Dillard with Bernstein.

Rob Painter:

Yes. So I'll give you, I'll say, a part of an answer now, and then I think this will be a good topic for us to have time to go into more detail in our Investor Day in early September. Chad, from a Trimble Construction One perspective, if you ask me -- if you're asking me what -- how much of the portfolio of, I'll say, both of the buildings as an infrastructure segment, I would see it applying to my goal is 100%, okay, maybe in reality, it's something a bit less than that. But in terms of ambition level, I think that's what you want to understand is that we rarely see that almost everything in and the business could apply in this mindset, in this approach to how we go to market. The part that would be back off of saying 100% is, hey, we have some small customers take some architects, for example, that we'll only want to buy our SketchUp product. And they can just buy our SketchUp product. We're not going to make them buy everything in order to use SketchUp. So wherever it can apply to customer sense. Our goal is to do that, both in the building construction side as well as the civil construction side of the business. And then in terms of the rollout, I talked about in the prepared remarks, the rollout to different personas, and we started with the contractor persona and construction. As we come into, say, the first half of next year, I'd say the end of this year and in the first half of next year, we'll start to see those additional personas roll out. And then the thing that goes along parallel with that work of the -- I'll say the product roll out to persona is the underlying digital systems transformation work that we're that we're doing. And that really is an enabler. These are very much linked. So when we talk about the increases in investments we're making into our digital transformation and that run rate has been -- is over, I'd say, over $20 million incremental a year, that is very much associated with driving Trimble Construction One and with our recurring revenue business across all of Trimble. So we're talking about TC1 as the Construction One, but we will have this approach in transportation and agriculture. To really efficiently and effectively scale the work, we need these underlying systems projects to come along. So I talked about that in the prepared remarks that I think we're making nice progress on the early releases. We've got a second release -- but hey, it's only in France and Benelux right now. We'll get to North America in the first half of next year, and of course, North America is where we have the largest amount of revenue. So there, we expect to really my hope and our plan is that we see acceleration in the business as we can be more efficient and effective and actually delivering Trimble Construction One. So I hope that gives you a little perspective, Chad. How many years? I think we're on a -- we're certainly on a multiyear journey. In fact, I talked about rolling out to different businesses within trial different industries within Trimble. Right now, we're also focused on the direct side of our business. We also have about half of Trimble that transacts through partner channels, they're indirect channels, and will be doing partner enablement on the systems work as well over time.

Rob Painter:

Yes, the best data I can give you on that, Chad, will be on Page 3 of the presentation that went along with the script. And so when I look at that and we were thinking about the call, we thought it would be constructive to look at the percent of software in Trimble compared to 10 years ago, the amount of recurring revenue or ARR that we have compared to 10 years ago, as well as the margin and cash flow expansion over that time frame. We were a company that had $361 million of ARR 10 years ago. We stand this quarter at $1.51 billion in ARR. $1.51 billion in ARR, there's not a lot of companies that have that amount of ARR. That's continued to grow over a longitudinal basis has grown 15%. We grew 15% ARR in the quarter, we took the guide up to 16% for the year on the ARR. We believe it's the most resilient of the revenue streams that we have, which is quite logical compared to, let's say, the hardware businesses, which, let's say, in normal times because right now, we do have a backlog in hardware and normal times look something more like a book and burn business. So there is a cyclical undertone to the secular thesis on the hardware business. But this is a major shift we've had in our business over the last few years. And when we've also done the stress test, looking back, you could go back to 2001, we have looked at the financial crisis in the 2008, 2009 time frame. We looked at commodity crash in the '14, '15 time frame as well as early COVID and we stress tested. We could go back and see how we stress tested on variability in the different end markets, as well as revenue streams. And that all informs the point of view we put forward on that ARR and the software side of the revenue.

Jerry Revich:

Rob, I'm wondering if we could just pick up that discussion. So it's interesting because your guidance essentially has you exiting ARR organic growth at about 17%, entering the year at 14%. Can you just talk about what's driving the acceleration? And do you see that acceleration continuing into early '23? I know you folks have a pipeline measurement mechanism that gives you pretty good visibility. I'm wondering if you could just touch on what that pipeline looks like as we exit this year?

Jerry Revich:

And then just to shift gears a little bit here. Can you just update us on your plans for subscription transitioning from perpetual license as you folks are moving towards the platforms that you spoke to, Rob, in the prepared remarks? Can you just update us on the size of the businesses that you should be looking for to transitioning to subscription from perpetual license given the platform approach?

Operator:

Your next question comes from the line of Kristen Owen with Oppenheimer.

Rob Painter:

So Geospatial is the most hardware-centric of the businesses have. And we -- therefore, it has the least amount of software, least amount of recurring revenue on an absolute dollar level. What the team has done is they have moved more of the -- some more of the software revenue that is in the business to recurring. So I'd say on a percentage basis, the ARR is growing nicely in Geospatial as it's growing off a smaller base and earlier in the transition. So there's a little bit of the percentages. If I'm only looking at that segment, that as a result of that math. That dilutes at the total company level. So it's really the other businesses that are driving the total company ARR dollars forward. But you asked a good question, which is, okay, given the amount of hardware that we have in that business, could that look more software-centric in the future and have more unlocks? And I'd say definitively, yes. One example is we have we call it a soft GNSS product, it's called Trimble Catalyst and it think of it as positioning-as-a-service. It's probably the best way to describe it. And we're seeing some really interesting levels of adoption of this positioning-as-a-service. And some applications that we wouldn't have expected to see before. In some cases, it's some traditional markets like GIS market, where it's taking up. We also have seen, giving you just a couple of examples, I wouldn't say this is across the business. But we've got a customer in the state of Florida where we did a competitive switch, and we move that customer entirely to an as-a-service basis everything, the hardware and the software, everything. Think of it as like a white glove service to that customer. So I do think that there's opportunity for the team to do that. And actually, one of the things that I think is really interesting that the team -- and very good that the team is doing, as we're consolidating the number of, I'll say, software products we have. So we're going from many and to really just a couple. And we're taking a mindset of microservices, architecture mindset. So capabilities such as photogrammetry or image recognition, we take as a micro service that's sold on our Trimble Business Center software platform within Geospatial. And so I think that does make for some interesting upsell and recurring revenue opportunities over time. Now besides the addressable market, I think, Kristen, will be lower than what we have in our other markets just by nature of the -- still of the underlying fundamental solution.

Rob Painter:

Yes, it's a terrific question, Kristen. In the short term, it will look more like a typical subscription model. But I will say we have a couple of the businesses that really are more on a consumption basis today. It could be consumption on a seasonal basis, let's say, on a farm cycle basis. It's in our Tekla Structures business. We have customers who will buy for the duration of a project. So that is something closer to consumption. I think if we were to fast forward, I don't know, I'll pick a number, 10 years. I think what comes after the typical subscription model does start to look like consumption in the -- on a longitudinal basis. And at that point, then you have to ask, are you really -- should you be talking about recurring revenue at that point, or is it total revenue to the metric shift over time. So we'll have a little bit of that consumption. But the vast majority in the next few years will look like a typical subscription model.

Jonathan Ho:

I just wanted to maybe start out with your thoughts around the pricing actions that you're taking. Is there a way you can provide us with a little bit of color in terms of the absolute levels, as well as realization, just given some of the inflationary pressure and FX pressures that your customers are facing?

Jonathan Ho:

And then just in terms of your comments about being much more secular play than cyclical, can you talk a little bit about some of these conversations that you had with large customers and their prioritization of Trimble over maybe more traditional cyclical acquisitions? And Yes, I guess what are you hearing from customers when it comes to preserving their budget spend with Trimble?

Operator:

Your next question comes from the line of Tami Zakaria with JP Morgan.

Rob Painter:

I'll start, and David, if I leave something out, you can jump in on this. A couple of dynamics on that inflection. If I look back to 3 months ago, we had come out of the first quarter, well, quite strong out of the first quarter. And if I take a market like European -- agriculture in Europe that had done quite well at the beginning of the year, that was the same time that we made the decision to exit Russia business. The Ukraine business is effectively shut down at the moment given the war. Between the 2, that's $65 million of revenue. It was my belief that at the 3 months ago that the market was so strong that it could absorb that $65 million, and I was looking at the backlog. I'd say, 3 months later, I was a little too optimistic on that. And if I look at the ag business for the second -- well, actually up level to the segment, the Resources and Utilities segment, we still expect double-digit organic growth in the second half of the year. And I really don't want that point to be lost through my commentary. So we're maintaining a view of double-digit organic growth in agriculture. And to me, the delta from the commentary a few months ago was -- one of the deltas is that I see less ability for that Russia business to just get absorbed into the system. And which I should also say, the majority of our Russia and Ukraine business was agriculture, a strong majority of it. Now connect to the other part of your question on the backlog, we still are running backlog that's, I'd say, a good $140 million ahead of where we would typically see backlog if we're looking back on a longitudinal basis. I think we'll end the year with a higher level of backlog than we expected 3 months ago, different by some of the different businesses in Trimble, and that connects to the commentary around supply chain. David, did I leave anything out?

Tami Zakaria:

And quickly, can you remind us your exposure to the residential market across the 4 segments, and whether you’re seeing any slowdown in the revenue end markets?

Operator:

Your next question comes from the line of Erik Lapinski with Morgan Stanley.

Rob Painter:

So the hardware sales yes, this is hardware primarily it's associated with essentially telematics subscription. We call it our mobility business. So you buy an onboard computer that's enabling technology for the I'll call it the long tail subscription, and we sell on a per truck basis. We felt -- we have an OEM business as well as an aftermarket business. We are primarily an aftermarket business. One of the inflections down we saw in the hardware business was one of our OEM partners taking less volume in the quarter than we anticipated. And that's been fluctuating up and down because as we know, both ourselves, but in this case, an OEM partner, they've got their own supply chain fluctuations independent of Trimble. So that was one inflection on the hardware for the quarter. And then in the aftermarket, I'd say that was lower than we had anticipated as well. We have launched an updated I'd say, offering. I talked about it in the prepared remarks. And we've got our biggest user conference in about 1.5 weeks that starts, which is our, I'd say, our best venue to roll out what we're doing in that business. So I'd say we're maybe a couple of months -- a few months behind where I thought we might be at this point and driving new business. But we are seeing the pipeline pick up around it. And then you noted the important point, which to me is the thing I didn't want to be lost in the commentary is that of ARR and the sequential growth in the ARR, and it's -- growth in ARR and sequential growth and if you look at the growth from the first quarter and then the growth into the second quarter on the ARR, that to me is the most attractive revenue stream. Well, it's the most attractive revenue stream we have in Trimble. It's the most attractive stream therefore within Transportation. And like that's where we've got to keep our eye on as continuing to drive that ARR forward in the business. So eyes are very much on that, both at the discrete product selling level, in this case, let's say, a telematics subscription, but also form of that Trimble Construction One for our transportation customers for them to be able to buy multiple solutions. So even in absence of having a frame around it, I'd say, it's well positioned as Trimble Construction One is at the moment. It's not like you have to wait to go and sell, “the house and transportation.” So we've got customers today who will buy our enterprise ERP solutions plus our mobility solutions plus video plus our final mile solutions plus our mapping solutions plus our maintenance solutions. So we have customers who are buying all of that today from us. And like our other businesses, we think that there's an attractive opportunity to upsell and cross-sell within the base. We'll talk a little bit more about it at Investor Day, but more than 90% of the top 200 trucking companies in North America are Trimble customers, today Trimble Transportation customers, and the majority of those -- very, very strong majority of those are not buying everything they could be buying from us. So we need to continue to work at the go-to-market and product level to get the, I'll say, deliver the most customer value so that we can increase the level of penetration into that market segment.

Rob Painter :

Thank you all. Thank you for attending the call. We look forward to talking to you next quarter.

Operator:

Thank you for standing by, and welcome to the Trimble First Quarter 2022 Results. [Operator Instructions]. I would now like to hand the conference over to Rob Painter, Chief Executive Officer. Please go ahead, sir.

David Barnes:

Thank you, Rob. Let's start on Slide 5 with a review of first quarter results. First quarter revenue of $994 million was up 14% organically year-on-year. Changes in foreign exchange rates subtracted 2% to revenue growth, resulting in reported growth of 12%. The strong revenue performance was broad-based. Approximately 2/3 of our 14% organic revenue growth came from volume, with the remaining 1/3 driven by the impact of price increases we have taken in the past year. Software and recurring revenue increased as expected, and hardware revenue was better than expectations, driven by the success of our operations team and getting more product through our supply chain. Gross margin in the first quarter was 57.9%, down 50 basis points year-over-year, reflecting higher product and freight costs in our supply chain, partially offset by increased pricing and improved software margins. Adjusted EBITDA margin was 25.5%, down 60 basis points year-over-year, driven primarily by lower gross margins and, to a lesser extent, higher operating expenses from our strategic investments and a return to normalized expense levels. Operating margin was 23.5%, down 10 basis points year-over-year. Net income dollars increased by 11%, and earnings per share increased by $0.07 to $0.73 per share. Our first quarter cash flow from operations was $153 million and free cash flow was $139 million. Cash flow was down year-over-year in the quarter as we continue to build inventory and as a result of our incentive plan payouts following very strong performance versus our 2021 objectives. Deferred revenue grew 14%, reflecting continued strong growth in recurring revenue streams. The underlying working capital dynamics in our business remains strong, and we expect that our net working capital will remain near 0 as the year progresses even in this difficult supply chain environment. Our net debt declined over $30 million in the quarter, and our net debt to adjusted EBITDA ratio remains around 1.0. Turning now to Slide 6. I'll review in more detail our first quarter revenue trends. ARR was up 12% in aggregate and up 14% organically. Our nonrecurring revenue streams grew with hardware up 11% year-over-year and perpetual software growing 8%. Our hardware growth was driven by strong performance in civil construction, geospatial and agriculture. Our hardware growth contributed to perpetual software growth as some of our hardware offerings are bundled with software. From a geographic perspective, North America revenues were up 11%. In Europe, revenues were up 14%. Asia Pacific was up 5% year-over-year, and the rest of the world was up 31%. Next, on Slide 7, we highlight some of the key metrics that we follow. Organic ARR in Buildings and Infrastructure, Geospatial and Resources and Utilities all grew in the teens or above, while transportation ARR growth was in the mid-single digits and improved sequentially. Net working capital, inclusive of deferred revenue, continued to be negative despite the build in inventory during the first quarter. Research and development on a trailing 12-month basis was 14.5% of revenue, with approximately 2/3 of our R&D investments going into software development. Of our $1.7 billion in backlog, approximately $345 million represents hardware backlog, down modestly from year-end 2021 levels but still well above our historical norms. Supply chain constraints continue to be very dynamic in nature, but our team made good progress in the quarter working around constraints and executing well in a challenging environment. Let's turn now to Slide 8 for additional detail on each of the reporting segments. Buildings and Infrastructure revenue was up 18% on an organic basis. Revenue growth was strong in both our Building and Civil Construction businesses, and organic ARR was up in the high teens in the quarter. Geospatial revenue was up 16% on an organic basis driven by strong performance in our survey and mapping business. Resources and Utilities revenue was up 16% on an organic basis driven by continued strength in agriculture in Europe, South America and the United States. Financial results in transportation showed progression in a number of areas. Revenue was up 2% on an organic basis year-over-year, and organic ARR growth improved for the third quarter in a row. We continue to progress on the conversion of our transportation enterprise software business to recurring revenue models and made good progress on development of a new product in our mobility business, which we believe will improve both margins and competitiveness when it is launched later this year. We continue to project improved momentum in margins and ARR growth in our Transportation segment in the fourth quarter. Turning now to Slide 9. I'd like to provide our updated financial outlook for 2022. As Rob highlighted earlier, demand remains broadly strong across the end markets we serve. High inflation, rising interest rates and the impact of the war in Ukraine are, of course, impacting sentiment around the world, but we don't see meaningful signs that these developments are reducing current demand for our offerings. Our backlog of $1.7 billion, which reflects historically high levels of hardware backlog and growth in our recurring revenue offerings, gives us significant visibility through the balance of 2022. We continue to expect supply chain challenges into 2023, although we are increasingly optimistic that we will see component availability improve in the second half of this year. With that backdrop, I'll talk through our updated guidance. Our recently announced divestitures and the strengthening of the value of the U.S. dollar will both impact our financial results for the balance of 2022, so I'll focus first on organic trends. The key message here is that our organic outlook for ARR, revenue and earnings have all improved. We are raising the midpoint of our organic revenue guidance by $30 million with an updated range of $3.99 billion to $4.07 billion. That revised view reflects an organic outlook for revenue growth of 10% to 12%. The midpoint of our organic EPS forecast has increased by $0.06 with a new EPS range of $2.85 to $3. We are raising our outlook for organic ARR growth to above 15%. Our full year outlook reflects our expectation that organic revenue growth will be in the mid-teens in our Buildings and Infrastructure and Resources and Utility segments where demand remains very strong and backlog is high. Geospatial organic growth is expected to moderate from the first quarter pace and be in the mid- to high single-digit range for the year against 27% growth in 2021. We expect that our Transportation segment will see low single-digit organic growth for the year with meaningful improvement by the fourth quarter when our initiatives to improve retention and grow ARR take hold. The table on Page 9 of our presentation bridges this organic outlook through the impacts of the changes in exchange rates and our upcoming divestitures. The U.S. dollar has appreciated significantly versus the euro and other major currencies in the last 90 days. Assuming that exchange rates remain where they are now, we estimate the impact on our revenue from our last outlook of approximately $45 million. We expect that the divestitures will close in the second quarter and will reduce our 2022 revenues by approximately $145 million. 60% of the revenue impact is in Buildings and Infrastructure, 30% in Geospatial, and 10% in transportation. As a result, our updated full year revenue guidance incorporating the impact of divestitures and recent changes in exchange rates is $3.80 billion to $3.88 billion. We now expect gross margins to be up approximately 100 basis points for the full year with the majority of that improvement coming in the second half. This reflects our view that the pricing actions we are taking will more than offset inflation in the second half. Our outlook for full year operating margins has increased to a range of 23% to 23.5%. Embedded in this outlook is the assumption that operating margins will be adversely impacted by our ongoing subscription transitions as well as the investments we are making in support of our Connect and Scale strategy and the acceleration of ARR. In aggregate, these factors present a headwind to operating margins of approximately 200 basis points for the year. Our outlook for the margin impact of subscription transitions and strategic investments is unchanged from what we presented a quarter ago. The divestitures will reduce full year EPS by approximately $0.11 and recent changes in foreign exchange rates will impact our earnings per share outlook by about $0.03, resulting in a revised full year EPS range of $2.71 to $2.86. Hardware makes up the substantial majority of the revenue of the divested businesses, and as a result, the divestitures will not have a meaningful impact on ARR trends. Looking to 2023 and beyond, we expect that the divestitures will be accretive to both revenue growth and operating margins. More strategically, our business post divestitures will be more centered on our platform strategy and our mix of ARR and software will be higher. Forecast for income from equity investments and net interest cost is unchanged. Our tax rate guidance has increased to a range of 18.5% to 19%. From a cash flow perspective, we project that free cash flow will be approximately equal to our non-GAAP net income with stronger performance in the second half of the year. This forecast reflects our view that our inventory levels will grow modestly and that the U.S. Congress will take action to permit the continued upfront deduction of R&D expenses. If the legislation is not passed and R&D costs are capitalized for tax purposes, then our 2022 cash flow outlook will be adversely impacted by approximately $70 million. Note that the tax capitalization of R&D cost has no meaningful impact on our book tax rates, only the timing of cash payments. A few words on the quarterly dynamics we expect for the balance of this year. The supply chain issues have disrupted the normal seasonal patterns in our business. While the second quarter would normally be our largest quarter in absolute revenue, that is not what we expect this year. After the impact of divestitures and recent currency movements, we expect second quarter revenue to be down slightly versus the second quarter of 2021, which was unusually strong. Following the second quarter, we expect revenue to increase sequentially through the third and fourth quarters, reflecting gradual normalization in the supply chain, higher prices and increasing software and recurring growth. From a gross margin perspective, we expect second quarter gross margins to be consistent with the first quarter and then the increase in the second half of the year as our additional pricing actions take effect. Driven by improved price realization and revenue mix, we expect gross margins will be approximately 250 basis points higher in the second half of the year compared to the first half, and operating margins will be approximately 200 basis points higher in the second half of 2022 versus the first half. We forecast second quarter earnings per share to be below second quarter 2021 earnings per share with double-digit year-on-year EPS growth in the back half of the year even after the impact of the divestitures. Most importantly, we have increased confidence in the drivers of our organic ARR progression for the remainder of the year. Rob, back to you.

Operator:

[Operator Instructions]. Our first question is from Jerry Revich from Goldman Sachs.

David Barnes:

Jerry, the divestitures haven't closed. We expect them to close in the second quarter. The proceeds will be a little over $200 million. I see that cash flow flowing into our overall capital allocation priorities. We are fortunate to have powder dry to do deals that will complement our strategy and growth. So that's the first priority. We are repurchasing shares. You probably saw, we did a little over $100 million in the first quarter. Our thinking is that we will continue to at least offset the dilution from stock comp and probably go a little higher given our current leverage position. But the overall priority is -- has not changed that our first focus on allocation of capital is to grow the business.

David Barnes:

Yes. So the first and pretty obvious point is the impact of the divestitures and foreign exchange, which have a pretty meaningful impact year-on-year and sequentially. I think you're right to focus on ARR growth because we do see that as a more reliable barometer of the momentum of our business. There are a couple of things that do impact Q2, particularly when you're looking sequentially versus Q1 this year. The two I'd focus you on are, one, the supply chain. We actually had a very, very strong Q2 of last year. We were making a big investment in our U.S. distribution center, which actually caused more shipments to get held up at the end of Q1 of last year and get shipped out in Q2. We kind of had the opposite phenomenon this year, where we had a very, very strong late quarter Q1 shipment pattern. You saw how strong our hardware shipments. That actually drove our backlog down a little bit, which is a good thing. And we are seeing some latent effects of the shutdowns in China. So there are a couple of factors that make organic growth tough on the hardware side. With regard to software, the issue is on our term license business, which is a growing part of our recurring revenue stream. A lot of our recurring revenue contracts renew in Q1, The accounting standards have term licenses, all the revenue hits when -- or the majority of the revenue hits when the term begins. And so that really causes sequential trends to look worse than the long-term trends would be, Q1 to Q2.

Jason Celino:

So Rob, you mentioned record software bookings in several parts of the business. I'm curious what areas did you see the strength? And then how much of that is related to maybe internal execution versus the current buying sentiment?

Jason Celino:

Okay. Perfect. That's good color. And then, David, on kind of the second half gross margin improvement, the confidence there. Is this any -- is this in part at all to some of the divestments being maybe lower margin or is it really just purely on the price realization of maybe some of the increases?

Operator:

Our next question from Tami Zakaria from JPMorgan.

David Barnes:

I wouldn't say moderation, no. I would say more signs that we've hit the peak and that we don't see acceleration in input costs. And then particularly looking to the second half, Tami, where we expect to see moderation is in our reliance on the broker market, which is where a meaningful part of our cost inflation comes from. So you'll have a part that has a normal standard cost of $1 or $2 or $3 that's available in the broker market for many, many times, 10, in some cases, even 100x the normal cost. So that's been driving a lot of our cost inflation, and we think that impact will be mitigated in the second half.

David Barnes:

Our -- most of it is volume. Our prices have firmed up a little bit. So we've been -- like a lot of businesses, we've been struggling to estimate how much inflation will be. And so our price outlook is a little better than it was last time, but the bigger driver is that our business is really strong and our ability to execute in the supply chain is a little stronger than we expected last time.

Jonathan Ho:

I just wanted to start with Construction One. How much of a lift does the platform provide relative to your traditional solutions when you think about selling through? And then how does that maybe impact something like net expansion over time?

Jonathan Ho:

Got it. Got it. And then just given sort of the backlog position that you have, is all of the backlog noncancelable? And are you seeing any evidence of maybe pull forward in demand, just given where lead times are?

Operator:

Next question from Colin Rusch from Oppenheimer.

Robert Painter:

It's Rob. So first, I'd shout out to all of our colleagues in Geospatial. They just continued a terrific run in the business. I'll give you a few comments. First, on the innovation side, and this is where the team deserves a lot of credit. So the number of new product introductions has really helped our global distribution channel be able to message out into the market. So whether it's a tilt compensation on our GNSS products. Laser scanner has been doing quite well for us. Mobile mapping business has been doing well, so has monitoring business unit. At an end market level where we've seen strengths are in Departments of Transportation. So I think infrastructure, think defense actually is also doing reasonably well. The net of all of that is we believe we're gaining market share in the business. And then I'd complement that by also talking about the go-to-market side, and the team has done a really nice job of working with our global dealer channel to drive the business forward.

Robert Painter:

Well, from a percent of the business, okay, the divestitures alone, you can think of that as 350 plus or minus basis points increase in the mix. In other words, more software mix. The thing that's always difficult with the percentages, Kristen, is if the hardware business continues to do well, and I think it will on the heels of coming infrastructure spend, we would expect that to benefit our hardware businesses, especially in the engineering and construction side of Trimble. So that, by the math, I think that, that would throttle that increased expansion in the percent of software. And ultimately, obviously, we take the dollars to the bank, not the percentages. If I were to say all things equal, what we've seen over a long baseline now is our recurring revenue is growing faster than our perpetual. It's been growing faster than our hardware. So take that baseline and if we're already in the now post divestiture in the high 50% of that mix, that's naturally moving towards a 60 -- 6 in front of it, so 60-plus percent. When you look at the growth in ARR, David mentioned raising our view on ARR during the year. And so -- and then that's before any, let's say, impact of future acquisitions and how that may further the mix. So 6, in front of it is where it's trending. And as we move towards Investor Day, I think we can sharpen the pencil on that. Your other question around operating leverage. I mean, certainly, it's our long-term view as you get through model transitions that the nature of the gross margins in the business and a recurring revenue business and software business for that matter are such that we should be able to increase the operating leverage over time. So our historical baseline has been plus or minus 25%, and that looks like something heading towards a 30%, something with a 3 in front of it is where we think about the long-term model, Kristen.

Operator:

Our next question from Rob Mason.

Robert Painter:

I think there's a little bit of a mixed story on that, Rob. We've certainly seen some areas of the portfolio where production is increasing, and we're seeing our business increase. And then I've seen others where it remains a bit challenged. So I have to say it's a little bit of a mixed view, not a totally consistent view. My read-through of OEM reports this quarter suggests that they're seeing tight supply chains as well for the rest of the year. And as you know, we primarily orient ourselves around the aftermarket and serving the mixed fleet. And what we're seeing in the aftermarket is continued strong uptake and adoption of the technology, and that really is the growth catalyst for the business.

Robert Painter:

Absolutely. Yes, absolutely.

Robert Painter:

Yes. No, it's a good question. So it may give you a historical comparison on the business mix and why we see our portfolio today being so much more resilient than in the past. And I'll give you a comparison of 2012 to our 2021 numbers. In 2012, the percent recurring revenue we had was about 18%. And in 2021, it was 34% of our business, and that correlates to that $1.47 billion of ARR that we exited Q1 with. Overall, software and services were 32% of our revenue in 2012, 55% at the end of 2021. If we look at the operating income in 2012, 76% of our operating income came from 2 of the segments, Geospatial and Resources and Utilities, and that was 53% in 2021. So the message is the portfolio has become much more balanced across the end markets that we serve over the last years, much more software-centric, much more recurring within that. So that gives us visibility and predictability into the model looking forward. If I look at the -- you asked about Buildings and Infrastructure in particular, that is a business that's absolutely transformed over the last 10 years. Today, that's approaching 3/4 of our segment and software today in Buildings and Infrastructure, and that would have been almost entirely hardware if you go back to the past. And then when we've looked at a baseline as well over time of how we've performed in times of recession or difficult economic environments, we only have a small number of years where we've ever actually have seen revenue go down in time. We were, in that first COVID in 2020, we were down about 4% in revenue. We look back to the financial crisis, we look back to 9/11, we look back to the commodity price collapse. There's just 4 years we can look back to where we ever had a revenue decline. And so I mapped that against what today is a much stronger and more resilient business model. And that's what gives us -- it's one of the many things that gives us confidence and conviction to continue to invest in our business.

Chad Dillard:

So I was hoping we could dig a little bit more into Viewpoint and e-Builder. Just what has the revenue growth been over this last quarter? What are you seeing in terms of order levels? And how are you thinking about those businesses in terms of 2022?

Chad Dillard:

That's helpful. And then just moving over to transportation. Just wanted to get your latest thoughts on -- your views on the path to normalization. And maybe you could kind of like break it down to two discussions. One on the volume side, and then two, on we can control more any potential like restructuring the cost base. And ultimately, I guess, kind of do you still think this is a core business?

Operator:

Our last question is from Meta Marshall from Morgan Stanley.

Robert Painter:

It's Rob. Let's just start at Europe. Europe growth in the quarter was 14%. That would have been higher yet, because that haircut's for FX. So in the high teens growth rate. So demonstrable, let's say, evidence that Europe produced in the quarter, and that was reasonably broad-based across all of our segments. Let's talk about Russia and Belarus, Ukraine and the dynamic and I'll focus first really on Russia, Belarus. So yes, at this point, we don't anticipate the revenue coming back. That business is largely agriculture and geospatial oriented. So now let's talk about the agriculture aspect of that business. Yes, the fact of the matter is that 13% of the world's calorie production is now off of the market. The fact of the matter is that with the fertilizer that comes out of that region. And now I'd say the lack of fertilizer are coming out of that region, you would expect to see lower yields around -- of crop around the world. That does provide the backdrop for what we see in commodity prices. Look at corn around 8, soy over 16. That food is going to be -- need to be produced somewhere. It doesn't happen overnight as we know. There's obviously a growing cycle to that. We would look at market. So I think about Brazil, I think about Canada, I do think about North America, Australia. And as we have a global footprint, we certainly turn our attention -- incrementally turn our attention to those markets. Now in the short term, the reality is that we have a lot of backlog in our agriculture business. And so in the short term, and I'll define short term as 2022, we don't see a material change to our revenue because we can direct that backlog elsewhere. It's really looking forward after that. And then if I take Ukraine specifically, we are doing everything we can to help our dealers in the region, it's really inspiring to see a number of our employees and partners continuing to find a way to actually make some of the business go. And so we'll do everything we can to help our customers and partners and the people in that region. And let's hope that, that crop can come back online before too long.

David Barnes:

Erik, I'll say it's very unpredictable. Everybody in the supply chain is hand to mouth. The numbers we posted for the first quarter reflect in part the fact that on a number of really constrained key components that were the gateway for us delivering full kit to our dealer customers, a bunch came in. So I think what happened was we're holding nothing back. They're holding nothing back. Just some constraints loosened just in the last few weeks of the quarter. So it's very hard to predict. And frankly, we ended up -- we ended the quarter stronger than we expected to and that was just driven by the availability of some key components we're waiting on. It doesn't reflect really any change in our approach or strategy, it's just the way product flowed in.

Operator:

[Operator Instructions]. There are no further questions at this time. Please continue.

Operator:

That does conclude our conference for today. Thank you for participating. You may all disconnect.

Operator:

Thank you for standing by, and welcome to the Trimble Fourth Quarter and Full Year 2021 Results. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Rob Painter, Chief Executive Officer of Trimble. Thank you. Please go ahead sir.

David Barnes:

Thanks, Rob. Turning to Slide 4. Fourth quarter revenue was $926 million, up 12% versus a year ago. Organic revenue growth was 14%. Our strong revenue in the quarter was enabled by the outstanding performance of our supply chain and operations team as hardware revenue grew by over 20% versus the fourth quarter of last year, notwithstanding the extraordinarily difficult supply chain environment. Backlog of unfilled hardware orders grew in the quarter, reflecting both the strong demand in our end markets and customers placing orders earlier than they would have in the past. Hardware backlog at the end of fourth quarter was nearly four times the level of a year ago before the supply chain challenges emerged. With this strong backlog, we have unprecedented visibility into demand for our hardware offerings going into 2022. ARR grew at an organic rate of 12% driven by business model conversions, strong bookings and healthy customer retention for recurring solutions in the quarter. Gross margins were 57.8%, down 90 basis points sequentially from third quarter levels and down 160 basis points from the fourth quarter of 2020. Gross margins were impacted by the mix of hardware revenue, higher inbound freight costs and our aggressive purchases of components in the broker market to support strong demand. Cost inflation was higher than our expectations and the price increases we took in our hardware offerings did not fully offset an unexpectedly sharp spike in cost inflation in the quarter. The price increases we have taken so far this year, averaging approximately 5% at the list price level across most of our hardware businesses and accompanied by reduced discounting have been accepted in the market. Given our leading position in the markets we serve, we are confident in our ability to maintain attractive margins. And we continue to adopt our pricing strategy to the cost outlook. Our EBITDA margin for the quarter was 24.1%, while operating income margins were 22.1%. As we expected, margins in the quarter were lower than the fourth quarter of 2020, but higher than Q4 of 2019. EPS was $0.62. We generated cash flow from operations of $155 million and free cash flow of over $140 million. Cash flow was lower than Q4 of 2020, driven by increased component inventory purchases. Turning now to slide 5, let's step back and review performance for the full year 2021. In the face of unprecedented challenges coming from the ongoing COVID disruptions supply chain shortages and accelerating inflation we achieved record results across a broad range of financial metrics. Revenue grew 16% to a record $3.66 billion and the ARR growth improved sequentially. While gross margins were down modestly, due to both inflation and the higher growth of our hardware revenues, EBITDA and operating margins ended the year above the levels of 2020 and at record levels in Trimble's history. Earnings per share were $2.66 up 19% versus a year ago. Cash flow from operations and free cash flow grew 12% and 14% respectively. Now on slide 6, from a geographic perspective revenues were up in all regions with the highest growth rate in Europe. North America revenue in the quarter also grew at a double-digit rate. Turning now to other key operating metrics on slide 7, I'll note that backlog ended the year at $1.8 billion. This is up from $1.3 billion a year ago. While backlog and our recurring offerings continued to grow, the majority of this increase came from hardware. And year-end hardware backlog exceeded our expectations of a quarter ago. Our results for 2021 reflect the achievement of a meaningful milestone. On a trailing 12-month basis our software services and recurring revenue exceeded $2 billion for the first time. Operating cash flow of over $750 million was also a record and exceeded 1.1 times non-GAAP net income. Turning now to our results by segment on slide 8, revenue was at or above our expectations in all segments. Buildings and Infrastructure revenue grew 14% versus prior year and 16% organically. Growth was strong across both hardware and software. Our sales of machine control solutions to civil construction customers grew by nearly 30% this quarter, despite supply chain constraints. ARR growth in the segment was strong with Viewpoint and e-Builder ARR together up at a mid-teens growth rate. SketchUp ARR growth was nearly 40%, while ARR gained momentum in our structures and MEP software businesses as they accelerated their transitions to recurring revenue models in the quarter. We ended the quarter with strong bookings momentum across our B&I Software businesses. Segment margins in the quarter were over 30%, representing a record fourth quarter for the segment despite cost inflation and the higher growth of hardware revenues. In B&I our price increases more than offset the hardware cost inflation, we saw in the quarter. Geospatial segment revenue increased 15% overall and 16% on an organic basis. Demand for our core survey and mapping portfolio remains very strong across all regions driven by strong spending in residential construction, civil infrastructure and utilities. Segment revenues also benefited from shipments against several large government contracts. Operating margins were below the levels of fourth quarter 2020 and the third quarter of 2021, driven principally by a short-term mix shift. The cost inflation we experienced in this segment was largely but not entirely offset by our 5% price increase and lower discounting. Resources and Utilities revenue grew 18% in total and 21% organically. Hardware backlog grew in R&U, reflective of very strong demand across the agriculture sector. The outlook for capital investment in ag remained strong driven by high crop prices, low inventories and high average equipment age. Segment margins were below those of a year ago and sequentially below third quarter levels. Product cost inflation was particularly high in this segment, as the cost of many critical components in our ag product offerings increased substantially in the quarter. In this segment our price increases have not yet kept up with inflation and we continue to refine our pricing strategy going forward. We anticipate operating margins in this segment in the coming year to rebound from the fourth quarter 2021 levels, as our price realization and mix improve. Consistent with our expectation coming into Q4, revenues and margins in our transportation segment were adversely impacted by supply chain challenges, both within our business and at our OEM customers. On the cost side, we experienced meaningful component inflation and high freight costs and we incurred costs related to realigning our product portfolio, toward available components. Slow production levels at our OEM customers also constrained our revenue of both hardware and recurring services in the quarter. The leading indicators from our transportation business continue to give us confidence that we are on the path to better ARR and margin trends, once the dynamics of the supply chain improve. We grew bookings year-on-year once again in Q4 and our net retention is at 100%. Our OEM customers are seeing stabilization in their own supply chain situation and we expect that orders from them will pick up early this year. Finally, on the cost side, we are introducing new products, which will support improved gross margins. For all these reasons, we project improved performance across the Transportation segment and ARR revenue and margins in the back half of 2022. Turning now to slide nine, I'd like to provide our financial outlook for 2022. We expect to see continued topline momentum. Demand from our end markets remain strong and so far, we haven't seen any signs of deceleration as a result of recent inflation and higher interest rates. Our backlog and forward-looking indicators of sentiment give us confidence in our prospects for ARR and revenue growth. As Rob and I have mentioned, we expect that supply chain disruptions will continue to be with us through 2022. There are signs that the pressure on component availability will abate in the back half of the year, but our plans presume that the supply chain will not be fully restored to equilibrium until 2023. With those factors in mind, we are initiating annual guidance for 2022. Excluding the impact of any additional acquisitions or divestitures, we project full year revenue of $3.95 billion to $4.05 billion, representing a range of growth outlooks of 8% to 11%. Our continuing transition of software offerings will present approximately 100 basis points of headwind to revenue growth. Organic ARR growth is expected to accelerate through the year to a mid-teens rate by year-end. We expect gross margins in 2022 to be comparable to or slightly better than 2021, with sequential improvement in the back half of the year. We expect that operating margins for the full year will be approximately 23%. Note that operating margins will be adversely impacted by the aforementioned subscription transitions, as well as investments we are making in support of our strategy and the acceleration of ARR. In aggregate, these factors present a headwind to operating margins of approximately 200 basis points. Income from equity investments is projected to be approximately $30 million, lower than 2021 due to higher product costs in our joint ventures. Net interest expense is forecast to be approximately $65 million and we project that our tax rate will be approximately 18%. Netting all this out, we project to achieve EPS in the range of $2.75 to $2.95. From a cash flow perspective, we project the free cash flow will once again exceed our non-GAAP net income. Our cash flow trends will be helped by the projected return toward equilibrium in the supply chain, as we anticipate needing lower component inventories by the end of the year. While we are focusing our guidance on expectations for the full year, I'd like to provide some color on the factors we expect to drive quarterly trends in 2022. Many of the normal seasonal patterns in our business are being disrupted by the impact of the constrained supply chain, so it is most helpful to think in terms of the expected sequential development from where we ended Q4 of 2021. We expect revenue to grow sequentially through each quarter of the year with ARR accelerating as well. From a product cost perspective, we expect to see inflation through the first half of 2022, similar to what we experienced in Q4 of 2021, with meaningful improvement in the second half. As a result, gross margins are likely to be relatively flat with Q4 of 2021 through the first half of the year and meaningfully higher in the second half. We expect that operating margins in the second half of the year will exceed the first half by approximately 150 basis points. I'll close by noting that we are planning an Investor Day in Colorado this September. And with that I'll turn it back over to Rob.

Operator:

[Operator Instructions] Your first question comes from the line of Chad Dillard from Bernstein. Your line is open. Please ask your question.

Rob Painter:

Good morning.

David Barnes:

Hi, Chad. This is David Barnes. I think the low end is 8% revenue growth. And I think your math is right there's some pricing in there. I'll note that the revenue growth will be impacted by about 100 basis points of transition, from perpetual to recurring some of our software businesses. We do expect hardware growth to moderate versus what we've seen this year. We'll be working through the backlog, but those are some of the big building blocks.

David Barnes:

Sure. The big -- if there's a change and there is a bit of a change it's that we're going to see more inflation than we had anticipated in the first half of 2022. Our outlook was a little more optimistic on that front. It's now clear that the supply chain being choked up, is going to last at least at some level through the end of next year. And we don't think the inflation scenario, in terms of our product costs will get meaningfully better. The guidance presumes sort of plateauing at Q4 levels. We do expect to see some price realization. I talked in the prepared remarks about margins in Ag. The sort of bad news of a lot of backlog is when you implement another price increase, you don't see it in revenue, right away. So those are the principal factors that would have operating leverage lower than we had indicated earlier. But I will point out that the deliberate decisions we're making in terms of model transition from perpetual to recurring, and then the investments against our strategic initiatives, each of those takes 100 basis points or so out of margins that we would have next year, if we weren't doing those things and that would generate very healthy operating leverage.

Chad Dillard:

Got it. Thanks I’ll pass it on.

Rob Wertheimer:

Thank you. There's a lot of obviously volatility in the supply chain. Could you be a little bit more specific, if you're willing on what is getting better into 2H, what you have visibility on? There's some talk on chips getting better. I don't know if that's been a big headwind. And then just your general feeling, is it stable in 1Q? There's obviously a lot of Omicron tick up potential and things like that. I don't know if it started getting better already in any ways? Thanks.

Rob Wertheimer:

And then begging your pardon, if you're willing to be so granular, you mentioned you have backlog so you don't have pricing coming through and resources and so on. The back half margin improvement, is that more pricing? Is that more like you assume expedite freight goes away? Is it more proven in all the things you just discussed, if you're willing? And I'll stop there. Thank you.

Rob Wertheimer:

Okay. Thanks.

Operator:

Your next question comes from the line of Colin Rusch from Oppenheimer. Your line is open. Please ask your question.

Rob Painter:

Hi. Good morning, Colin. It's Rob. So hey, AgileAssets fits perfectly into our strategy. We think it's really in the center of the bull's-eye. It's a growing SaaS business and it connects well with the broader Trimble platform. So it is a growth story and we've got a high conviction that we can grow this business on its own and that it can be a catalyst for the growth of other Trimble solutions. When we put it in context of the digital twin in the prepared remarks, we talked about this intersection point of the as-maintained model with an as-designed and an as-built. So if you think about it from the life cycle point of view, which is really central to our strategy, this adds really that final step in the operations and maintenance phase. And so a digital twin in its truest form is much broader than a design model and often people will talk about it more in a design sense. We think the combination and intersection of the design with the as-built with the as-maintained is actually a true digital twin and the early indication we have from joint customers and from departments of transportation is quite encouraging to us.

Rob Painter:

We see autonomy as it emerges in transportation. I'd say at some level similar to agriculture or construction. And that is in an autonomous world which by the way is probably really more of a more automated world in an autonomous world, the truck still needs to have a work plan. It still needs to understand how to route and how to navigate. It still needs to understand how to optimize within the entire fleet. It still needs to understand how to give a dynamic estimated time of arrival to the customer. It needs the brains behind it. Arguably, the autonomous vehicle or dozer or tractor is a dumb node. It doesn't know what to do. It needs a work order. It needs a work plan. It needs that brain. And that intersected with what we do at Trimble in the office the systems of record, the scheduling, routing, dispatch we think provide high relevance in a more automated world. In addition there's autonomous capabilities that we can provide companies on highway. So for instance in our correction services business, we now have over 10 million miles that have been managed through our correction services which are really providing ADAS capabilities.

Operator:

Your next question comes from the line of Tami Zakaria from JPMorgan. Your line is open. Please ask your question.

David Barnes:

I'll defer the longer-term question to Rob. With regard to margins Tami, there's a story both of mix and of higher input costs. There are a number of key components in our displays for guidance in agriculture where the supply was particularly tight. I mentioned a moment ago that when the markets are tight we and other providers of hardware technology have to go to the broker market to fill the needs. And in some cases a part that would normally cost $3 costs $30 or $40. So it's easy to see really dramatic cost spikes that happened disproportionately in this segment. So we've taken pricing actions. But in this particular segment the cost increases are meaningfully higher. So we're relooking at our pricing strategy and we're going to have to take some actions to improve our margins going forward. We do think there's partly a story of mix here and what we were shipping in Q4 is disproportionately on the lower end of the margin scale. So it will get better. But no doubt we have a margin challenge to wrestle with in this segment. And Rob you want to talk about the longer-term outlook?

Tami Zakaria:

Understood. That's helpful. That's all for me. Thank you so much.

Operator:

Your next question comes from the line of Gal Munda from Berenberg. Your line is open. Please ask your question.

David Barnes:

Sure, Gal. It's David. I'll look both a little bit backward and forward. So for the full year, the measurement we do indicates that the transition impact in 2021 was about 100 basis points negative impact to revenue. That's actually less than we thought going into the year. And the reason, it's less is that we had higher last-time buys of perpetual offerings in our structural design business. So right now, the impact the vast majority of the impact the 100 basis points whether it's for full year 2021, or full year 2022 are in our building software businesses. There's a decent chunk in the transportation business as well. Actually, we're going to see a piece of it in the civil software – civil construction software business, as we roll out our platform-as-a-service model. So you asked about the longer outlook. I'll tell you that the – if you look at our perpetual software revenue just under $500 million for 2021, we're already at a point where 70% or 75% of that perpetual software is sold bundled with hardware. So the straight software offerings are only 25% of it, by which I mean to say, we will at the end of 2022 be through the significant majority of the model transitions on the straight software businesses. But we are looking to transform to recurring revenue models the platform-as-a-service where – that's where we're moving, and we'll have some meaningful revenue in civil construction this year. We also have bundled perpetual software with hardware in the surveying business and in Ag, and that will be further out. So it's a little early to call on, how long that transition will take. Actually that's a topic we plan to cover off at our investor conference in September. But that's less straightforward to transition than a traditional software business. You've got -- you're bundled with hardware, you've got multiple regions and dealers. And so it's a harder problem to solve. It's likely to take several years.

David Barnes :

Yes. So I think I'm following you Gal. The margins are really high on both perpetual software and recurring. The difference is that when you sell subscription, you recognize the revenue and margin over many years rather than upfront. So I think our math is good that the conversions we're doing reduce revenue versus if you'd stayed in the perpetual model by the numbers we're saying and it essentially all goes through to the bottom line.

Gal Munda:

Great. Awesome. Thank you.

Jerry Revich:

Yes. Hi. Good morning everyone.

Jerry Revich:

I'm wondering if you could talk about the outlook for mid-teens ARR growth exiting the year. Really interesting outlook considering e-Builder and Viewpoint are delivering that level of growth now. So I'm wondering what needs to happen in transportation to get to that run rate. Or are you looking for an acceleration or further acceleration in e-Builder and Viewpoint to get there? Maybe just give us a little bit more clarity on what drives the acceleration from 11% today?

David Barnes:

Yes. Rob got it right, Jerry. We're at or close to mid-teens in the ARR growth of our businesses other than transportation. We're much lower than that in transportation. And we do project a recovery. We don't think we'll get all the way to numbers we think are good long-term by the end of the year, but the outlook presumes that we maintain and put some momentum across the businesses that are growing well now outside transportation and the transportation begins meaningful growth. So you put all that together, we get to mid-teens. And if we do even more than that then we'll be on the high end of our outlook. But that's how we get there.

Rob Painter:

I'd be careful about extrapolating from SketchUp to all the other businesses. Certainly, the SketchUp story is an amazing one. It really is sort of great flagship example of how changing the business model expands the addressable market on SketchUp. It has a quasi-consumer appeal, which Tekla would not. It's a very sophisticated product. So we're early days in the model conversion on Tekla. I don't think you'll see the expansion in the addressable market in that offering that we've had in SketchUp.

Operator:

Your next question comes from the line of Jason Celino from KeyBanc Capital Markets. Your line is open. Please ask your question.

Rob Painter:

In context of Connect & Scale, I think about two dynamics. One -- actually, I think three dynamics. One is our own organic progression and we -- the second is acquisition and the third is partnership. From our own organic progression, we believe we have an immense opportunity just to mine the data and the customer opportunities within -- I'll say, within the house. In other words, the cross-sell and the up-sell within the Trimble portfolio as evidence of that is our Trimble Construction One launch where we're creating persona-based bundles to go after the construction industry to better serve those customers. So, that's our primary use I'll say of capital allocation. Second, from an acquisition standpoint, we're definitely open to acquisition, not for the sake of acquisition if it helps accelerate the strategy. And so the two vectors we tend to look at on acquisitions are

Rob Painter:

Yes, I think that's a fair way to think about it. I -- the words I tend to use internally are strategy structure systems. I believe an organizational structure follows the strategy and I believe the underlying systems are meant to be enablers of that structure and ultimately the strategy. So in the strategy of Connect & Scale, we see an enormous opportunity around the infrastructure bill since I think that's what you were asking about, when you said infrastructure. You may have meant our internal infrastructure. But if we're talking the IAJA, we see a large opportunity there that connects to the acquisition of AgileAssets to bring more aspects of Trimble together to positively impact the opportunity inside of construction. So within that strategy, then we organized ourselves. Well, sorry, actually also on the strategy side, yes that captures product and go-to-market. So I totally agree with you there. You've got to have -- and the product looks like the Suite, the collections of our technology and the go-to-market for us has as you look in the totality of Trimble has a hybrid aspect of direct and indirect that comes together. Okay. Then on the organizational structure side, we organize ourselves around the industries that we serve. So we have an industry leader for civil construction, for building construction, for agriculture, for survey and mapping for transportation. So we have that single point of accountability, to those end markets that we're serving. And then the underlying systems that captures some of the digital transformation systems work that we are doing, to give us that ability to better serve customers and to help us scale efficiently and effectively.

Rob Painter:

You’re welcome.